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NEW 
INCOME  TAX 

MANUAL 


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A  New 
Income  Tax  Manual 

Explaining 
The  Requirements  of 

The  Federal  Income  Tax  Law 

And  the  Treasury  Department  Regulations  ' 

With  Respect  to  the  Administration  Thereof. 

By 

JOSEPH  WALKER  MAGRATH, 

Counselor  at  Law,  New  York.  \ 

Author  of 
"An  Income  Tax  Manual,"  "The  Federal  Income  Tax.'' 


New  York 

THE  BENCH  AND  BAR  COMPANY 

27  Cedar  Street 

1915 


u-3^^^^ 
^V^ 


Copyright,  1915, 

by 

JOSEPH  WALKER  MAGRATH 


LECOUVER    PRESS   CO.. 

Law  Printers, 
61   Veaey   St.,    New   York. 


PREFACE 

The  object  of  this  book  is  to  present  a  general  explana- 
tion of  the  requirements  of  the  Federal  Income  Tax  Law 
and  the  Regulations  and  Rulings  of  the  Treasury  Depart- 
ment with  respect  thereto. 

Being  in  the  nature  of  a  compilation,  it  is  proper 
that  there  should  be  references  to  the  authority  upon 
which  its  statements  are  based,  and  for  this  reason  numer- 
ous references  are  made  to  the  Law  itself,  by  paragraphs, 
thus:  (Par.  E),  (Par.  G,  subd.  a),  etc.;  to  the  Regulations 
and  Rulings  of  the  Treasury  Department,  by  their  re- 
spective numbers,  thus:  (T.  D.  1887),  (T.  D.  1901),  etc.; 
and  to  the  General  Regulations  by  articles,  thus:  (G.  B. 
1),  (G.  B.  2),  etc. 

References  are  also  made  to  the  various  forms  which 
have  been  prescribed  by  the  Department  by  their  num- 
bers, thus  (Form  1000),  (Form  1001),  etc.,  and  to  the 
instructions  or  special  notices,  appearing  on  some  of  the 
forms  in  a  similar  manner,  thus,  (Instr.  Form  1031), 
(Instr.  Form  1040),  etc.  These  references  are  invariably 
to  the  revised  forms  which  have  recently  been  issued  by  the 
Treasury  Department  and  not  to  earlier  forms  bearing 
the  same  numbers  but  now  obsolete. 

In  addition,  references  are  made  to  various  letters  of 
the  Treasury  Department  containing  rulings  which  have 
not  been  embodied  in  the  Treasury  Decisions.  These  let- 
ters are  published  by  the  Corporation  Trust  Company 
of  New  York  in  connection  with  its  most  efficient  Income 
Tax  Service,  his  indebtedness  to  which  the  author  takes 
pleasure  in  acknowledging. 

References  from  one  part  of  the  book  to  another  are 
made  by  section  numbers,  thus:  (See  Sec.  5),  (See  Sees. 
8,  12),  etc. 

The  Treasury  Decisions  covered  by  this  book  are  those 
relating  to  the  Income  Tax  numbered  from  1887  to  2090, 
both  inclusive.  T.  D.  1887,  approved  Oct.  25, 1913,  was  the 
first  Treasury  Decision  issued  on  this  subject,  while  T.  D. 
2090,  issued  Dec.  17, 1914,  is  a  synopsis  of  previous  rulings 

[i] 


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ill  NEW  INCOME  TAX  MANUAL. 

on  questions  relating  to  the  Income  Tax,  and  hence  con- 
stitutes a  suitable  stopping  point. 

It  is  not  to  be  expected  that  a  general  explanation 
of  this  character  should  present  the  solution  of  every  ques- 
tion which  may  arise  in  connection  with  the  administra- 
tion of  the  law,  and  the  author  has,  as  a  rule,  refrained 
from  any  expression  of  his  own  views ;  but  it  is  hoped  that 
the  manual  will  suffice  to  give  the  reader  a  clear  under- 
standing of  what  the  law  and  the  regulations  in  terms 
require,  how  they  affect  him,  and  what  he  must  do  to 
comply  therewith. 

JOSEPH  WALKER  MAGRATH. 

27  Cedar  Street,  New  York  City. 

January  2,  1915. 


CONTENTS 

§  1.    Upon  Whom  Tax  Imposed,  p.  1 

§  2.     Rate  of  Tax,  p.  4 

§  3.     Amount  on  Which  Tax  Payable,  p.  5 

§  4.     How  Net  Income  of  Individual  Computed,  p.  5 

§  5.     How  Net  Income  of  Corporation,  Association,  etc..  Com- 
puted, p.  13 

§  6.     Accumulation  of  Income,  p.  22 

§  7.     The  Specific  Exemption,  p.  22 

§  8.    Exemption  of  Compensation  of  Public  Officers  and  Em- 
ployees, p.  24 

§  9.     Exemption  of  Interest  upon  Public  Securities,  etc.,  p.  25 

§10.     Exemption  of  Income  Derived  from  Public  Utilities,  etc., 
p.  26 

§11.     Necessity  for  Return,  p.  26 

§12.     Who  Required  to  Make  Return,  p.  27 

§13.     Time  for  Making  Return,  p.  30 

§14.     To  Whom  Return  Made,  p.  31 

§15.     Form  of  Return  Generally,  p.  32 

§16.     Return  of  Individual,  p.  32 

§17.     Return  of  Corporation,  Association,  etc.,  p.  35. 

§18.     Return  of  Fiduciary,  p.  38 

§19.    List  Returns  of  Person,  Corporation,  etc..  Occupying 
Position  of  Source  of  Income,  p.  40 

§20.     Verification  of  Return,  p.  43 

§21.     Return  by  Commissioner  of  Internal  Revenue  for  De- 
linquent, p.  44 

§22.     Increasing  Amount  Shown  by  Return,  p.  44 

§23.     Compelling  Testimony  and  Production  of  Books  and 
Papers,  p.  44 

§24.     Inspection  of  Returns,  p.  45 

§25.     Disclosing  or  Publishing  Information  Contained  in  Re- 
turns, p.  45  ' 

§26.     Taxing  Periods,  p.  45 

§27.     Assessment  of  Tax,  p.  47 

§28.     Notice  of  Assessment,  p.  47 

[iS] 


iv  CONTENTS. 

§29.     By  and  to  Whom  Tax  Paid  Generally,  p.  47 

§30.     Time  and  Mode  of  Pa3anent,  p.  48 

§31.     Receipt  for  Payment,  p.  49 

§32.     Collection  at  the  Source  of  Income  Generally,  p.  49 

§33.     Items  on  Which  Tax  Not  Withheld  at  the  Source,  p.  53 

§34.  Collection  of  Tax  on  Interest  on  Bonds,  Mortgages,  etc.» 
of  Corporations,  Associations,  etc.,  p.  55 

§35.  Collection  at  the  Source  of  Tax  on  Income  Other  than 
Interest  on  Bonds,  Mortgages,  etc.,  of  Corporations, 
Associations,  etc.,  p.  64 

§36.  Collection  of  Tax  on  Income  Arising  in  Foreign  Coun- 
tries, p.  68 

§37.  Collection  of  Tax  on  Income  of  Estates  Held  in  Trust, 
p.  71 

§38.    Provisions  as  to  Partnerships,  p.  74 

§39.     Penalties,  p.  75 

§40.    Time  Table,  p.  76 

§41.     Practical  Working  of  Law— Preparation  of  Return,  p.  77 

§42.     How  to  Obtain  Forms,  p.  86 


NEW  INCOME  TAX  MANUAL 


§1.      UPON   WHOM  TAX  IMPOSED. 

Section  II  of  the  Tariff  Act  of  1913,  known  as  the  "In- 
come Tax  Law,"  imposes  a  tax  upon  the  income  of : 

(1)  Every  citizen  of  the  United  States,  whether  re- 
siding in  the  United  States  or  abroad.  (Par.  A,  subd.  1; 
G.  R.  1)  The  (Constitution  of  the  United  States  provides 
that  "All  persons  bom  or  naturalized  in  the  United  States, 
and  subject  to  the  jurisdiction  thereof,  are  citizens  of  the 
United  States  and  of  the  state  wherein  they  reside,"  and 
it  is  also  well  established  that  the  children  of  citizens, 
although  born  outside  of  the  United  States,  are  themselves 
citizens  of  the  United  States.  The  operation  of  the  law 
is  not  confined  to  those  who  have  political  rights,  but  the 
tax  is  imposed  upon  all  who  come  within  the  meaning  of 
the  term  "citizen,"  regardless  of  age,  sex,  or  any  other 
consideration  affecting  their  civil  or  political  status. 

(2)  Persons  other  than  citizens  of  the  United  States, 
but  who  reside  in  the  United  States.  (Par.  A,  subd.  1; 
G.  R.  1)  By  this  is  meant  a  residence  of  a  permanent 
character,  as  it  is  not  intended  to  impose  a  tax  upon  per- 
sons who  are  merely  visiting  the  country  with  no  inten- 
tion of  remaining  here  for  any  considerable  time. 

(3)  Persons  who,  although  neither  citizens  nor  resi- 
dents of  the  United  States,  derive  an  income  from  prop- 
erty owned  or  business  carried  on  in  the  United  States, 
to  the  extent  of  such  income.     (Par.  A,  subd.  1;  G.  R.  1) 

(4)  Corporations,  joint-stock  companies  or  associa- 
tions, and  insurance  'companies,  organized  or  existing 
under  the  laws  of  the  United  States  or  any  State  or  Terri- 
tory. (Par.  G,  subd.  a;  G.  R.  76)  As  to  what  constitutes 
a  corporation  or  joint-stock  company  or  association  see 
G.  R.  78,  79. 

(5)  Corporations,  joint-stock  companies  or  associa- 
tions,  and  insurance   companies,   organized   or   existing 
under  the  laws  of  foreign  countries,  but  deriving  an  in- 
come from  business  transacted,  capital  invested,  or  prop- 
Ell 


2  NEW  INCOME  TAX  MANUAL. 

erty  owned  in  the  United  States,  to  the  extent  of  such  in- 
come.    (Par.  G,  subd.  a;  G.  R.  46,  77) 

Corporations,  Associations,  Etc.,  Exempt 
from  Tax.— The  tax  is  not  to  be  paid  by  labor,  agricul- 
tural, or  horticultural  organizations;  mutual  savings 
banks  not  having  a  capital  stock  represented  by  shares; 
fraternal  beneficiary  societies,  orders,  or  associations  oper- 
ating under  the  lodge  system,  paying  death,  sick, 
accident,  or  other  benefits  to  members  or  their  de- 
pendents; domestic  building  and  loan  associations; 
cemetery  companies  organized  and  operated  exclu- 
sively for  the  mutual  benefit  of  their  members;  corpora- 
tions or  associations  organized  and  operated  exclusively 
for  religious,  charitable,  scientific,  or  educational  pur- 
poses, no  part  of  whose  income  inures  to  the  benefit  of 
any  private  stockholder  or  individual;  business  leagues; 
chambers  of  commerce  or  boards  of  trade  not  organized 
for  profit  and  no  portion  of  whose  net  income  inures  to 
the  benefit  of  any  private  stockholder  or  individual;  or 
civic  leagues  or  organizations  not  organized  for  profit  and 
operated  exclusively  for  the  promotion  of  social  welfare. 
(Par.  G,  subd.  a;  G.  R.  87) 

The  agricultural  and  horticultural  associations  which 
are  exempt  are  such  associations  as  county  fairs,  or  like 
organizations,  not  themselves  engaged  in  agricultural  or 
horticultural  pursuits,  but  which,  by  means  of  awards, 
premiums,  etc.,  are  intended  to  encourage  better  produc- 
tion, and  no  part  of  whose  income  inures  to  the  benefit 
of  any  private  stockholder  or  individual.  The  exemption 
also  extends  to  fruit-growers'  associations  whose  purpose 
is  to  promote  the  mutual  benefit  of  their  members  in  mar- 
keting their  products,  which  are  not  organized  for  profit 
and  have  no  capital  stock  represented  by  shares,  and  whose 
income  is  derived  wholly  from  membership  fees,  dues,  and 
assessments  to  meet  necessary  expenses.  Corporations  en- 
gaged in  agricultural  or  horticultural  pursuits  for  profit 
are  liable  to  the  tax,  as  are  also  corporations  owning  sugar 
or  other  plantations  and  disposing  of  the  products  thereof. 
(T.  D.  2090) 


NEW  INCOME  TAX  MANUAL.  3 

Domestic  building  and  loan  associations  are  not  ex- 
empt unless  all  the  profits  and  benefits  provided  for  are 
ratably  distributed  among  all  members  regardless  of  the 
kind  of  stock  held,  according  to  the  amount  of  money 
they  have  on  deposit.  This  excludes  from  the  exemption 
an  association  issuing  different  classes  of  stock  upon 
which  different  rates  of  interest  or  dividends  are  guar- 
anteed or  paid.  (O.  R.  87) 

Mutual  telephone  companies,  mutual  insurance  com- 
panies, and  the  like  are  not  exempt  from  the  income  tax, 
even  though  they  are  organized  primarily  for  the  mutual 
benefit  of  their  members  and  not  for  profit.  (T.  D.  1933; 
G.  R.  80;  T.  I>.  1996)  Neither  are  co-operative  dairies 
exempt.     (T.  D.  1996;  T.  D.  2090) 

In  order  to  secure  exemption,  a  corporation,  etc., 
must,  when  requested  by  the  Collector  or  Commissioner 
of  Internal  Revenue,  establish  its  right  to  exemption  by 
aflSdavit  or  otherwise.  It  is  not  suflflcient  for  such  an 
organization  merely  to  declare  that  it  is  exempt,  but  it 
must  show  the  character  and  purpose  of  the  organization, 
the  manner  of  distributing  the  net  income,  if  any,  or  that 
none  of  the  net  income  inures  to  the  benefit  of  any  private 
stockholder  or  individual.     (G.  R.  88) 

All  clubs  are  not  exempt  from  the  provisions  of  the 
income-tax  law,  even  though  not  operated  for  profit.  A 
club  desiring  to  be  registered  as  an  exempt  organization 
should  file  with  the  Commissioner  of  Internal  Revenue  a 
copy  of  its  charter,  or  an  aflSdavit  of  its  principal  officer, 
setting  forth  the  nature  of  its  organization,  the  purpose  for 
which  organized,  the  source,  if  any,  from  which  it  derives 
income,  and  the  disposition  made  of  such  income  as  is  re- 
ceived by  it,  for  consideration  and  determination  as  to 
whether  or  not  it  comes  within  the  class  of  organizations 
held  to  be  exempt.     (T.  D.  2090) 

Partnexrsliips,  as  such,  are  not  liable  to  an  income 
tax,  but  the  share  of  each  partner  in  the  profits  or  in- 
come of  the  firm  is  included  in  his  personal  income  upon 
which  he  pays  a  tax  as  an  individual.     (See  Sec.  38) 

Individuals  ivhose  net  income  does  not  ex- 
ceed $3,000  are  exempt  from  the  payment  of  the  tax 


4  NEW  INCOME  TAX  MANUAL. 

(see  Sec.  7),  but  where  their  income  is  such  as  to  be  tax- 
able at  the  source  they  may  lose  the  benefit  of  this  exemp- 
tion by  neglecting  to  take  the  steps  necessary  to  secure  it. 
(See  Sees.  32,  34-36) 

§2.      RATE  OF   TAX. 

The  Law  provides  for  two  classes  of  tax: 

(1)  The  normal  tax  is  at  the  rate  of  1%,  and 
is  imposed  alike  upon  individuals  (Par.  A,  subd.  1),  cor- 
porations, joint-stock  companies  or  associations,  and  in- 
surance companies.     (Par.  G,  subd.  a) 

(2)  The  additional  tax  is  a  graduated  tax  in 
addition  to  the  normal  tax,  imposed  upon  individuals 
whose  incomes  are  large  (Par.  A,  subd.  2;  G.  R.  2)  Cor- 
porations, joint-stock  companies  or  associations,  and  in- 
surance companies  are  not  subject  to  the  additional  tax 
(G.  R.  185),  but  nonresident  aliens  are  subject  thereto. 
(G.  R.  8)    The  rate  of  the  additional  tax  is  as  follows: 

1%  on  income  over  $20,000  and  up  to  $50,000. 
2%  on  income  over  $50,000  and  up  to  $75,000. 
3%  on  income  over  $75,000  and  up  to  $100,000. 
4%  on  income  over  $100,000  and  up  to  $250,000. 
5%  on  income  over  $250,000  and  up  to  $500,000. 
6%  on  income  over  $500,000. 

The  Income  Tax  Law,  in  so  far  as  it  affects  private 
individuals,  thus  imposes  a  constant  tax  on  all  income 
(over  $3,000  or  $4,000  as  the  case  may  be)  and  an  addi- 
tional tax  at  a  varying  rate  on  income  in  excess  of  $20,000. 
But  it  is  to  be  borne  in  mind  that  the  possession  of  an 
income  subjecting  one  to  an  additional  tax  does  not  render 
one  liable  to  pay  that  tax  upon  the  entire  income,  but 
only  on  the  excess  over  particular  amounts.  For  illustra- 
tion see  Sec.  41. 

In  the  case  of  a  hnsband  and  xrife  having 
separate  incomes,  the  additional  tax  is  computed  upon  the 
basis  of  the  separate  income  of  each  and  not  upon  the  basis 
of  the  combined  income  of  both.  (T.  D.  2090)  To  illus- 
trate, let  us  disregard  all  exemptions  and  deductions,  and 
suppose  the  case  of  a  husband  and  wife  each  having  a 


NEW  INCOME  TAX  MANUAL.  5 

separate  income  of  |30,000.  In  such  case,  there  would  be 
an  additional  tax,  as  to  each,  amounting  to  $100,  being  1% 
on  the  excess  over  $20,000,  the  total  additional  tax  thus 
being  |200.  If  the  incomes  were  combined,  making  a  total 
of  $60,000,  the  additional  tax  would  be  $300  on  the  excess 
over  $20,000  up  to  $50,000,  and  $200  on  the  excess  over 
$50,000,  a  total  of  $500.  It  will  thus  be  seen  that  this 
ruling  makes  the  tax  much  less  onerous  than  it  would 
otherwise  be  in  the  case  of  husband  and  wife  having  large 
separate  incomes. 

§  3.      AMOUNT  ON  WHICH  TAX  rATABLE. 

Individuals  who  are  citizens  or  residents  of  the  United 
States,  and  domestic  cori)orations,  joint-stock  companies 
or  associations,  and  insurance  companies  are  taxed  ux)on 
their  entire  net  income,  by  which  is  meant  the  gross,  or 
entire  income,  less  certain  deductions  authorized  by  the 
law.     (G.  K.  3)     (See  Sees.  4,  5) 

Persons  who  are  neither  citizens  nor  resi- 
dents of  the  United  States  are  taxed  upon  their  net  in- 
come accruing  from  property  owned,  or  business,  trade, 
or  profession  carried  on  by  them  within  the  United  States. 
(Par.  A,  subd.  1) 

Foreign  corporations  and  associations.— 
A  corporation,  joint-stock  company  or  association,  or  in- 
surance company,  organized,  authorized,  or  existing  under 
the  laws  of  a  foreign  country,  but  doing  business  within 
the  United  States,  must  pay  the  normal  tax  of  1%  upon 
the  amount  of  net  income  accruing  from  business  trans- 
acted and  capital  invested  within  the  United  States.  ( Par. 
G,  subd.  a) 

§4.      HOTV  NET  INCOME  OF  INHIVIHUAL 
COMPVTEH. 

The  gross  income  of  an  individual,  within  the  mean- 
ing of  the  Income  Tax  Law,  includes  gains,  profits,  or  in- 
come from  practically  every  conceivable  source  (Par.  B; 
G.  K.  4)  except  the  proceeds  of  life  insurance  policies,  paid 
upon  death,  maturity,  surrender,  or  by  way  of  annuity 


<  NEW  INCOME  TAX  MANUAL. 

OP  otherwise.  Where  property  is  acquired  by  gift,  be- 
quest, devise,  or  descent,  the  income  from  such  property 
is  to  be  included,  but  not  the  value  of  the  property.  (Par. 
B;G.  R.  5;  T.  D.  2090) 

Pensions  from  the  United  States  must  be  included 
as  income.     (T.  D.  2090) 

Aliniony  must  be  included  as  income.     (T.  D.  2090) 

Gains,  profits,  or  income  derived  from 
sifts,  as  distinguished  from  the  value  of  the  gifts,  are 
subject  to  the  tax.  (Par.  B;  G.  R.  5;  T.  D.  2090)  Thus, 
if  property  acquired  by  gift  is  subsequently  sold  at  a  price 
greater  than  the  appraised  value  at  the  time  when  the 
property  was  so  acquired,  the  gain  in  value  is  held  to  be 
income  subject  to  the  tax.     (T.  D.  2090) 

Amount  received  under  life  insurance, 
«ndoiirment,  or  annuity  contract.— The  amount 
which  is  paid  under  a  life  insurance,  endowment,  or  an- 
nuity contract  is  not  income  when  returned  to  the  person 
making  the  contract,  either  upon  the  maturity  or  surrender 
of  the  contract;  but  the  amount  by  which  the  sum  received 
exceeds  the  sum  paid  and  coming  into  the  hands  of  the 
person  making  the  contract  and  payment  is  income.  When 
the  settlement  under  such  a  contract  is  made  in  more  than 
one  payment  each  payment  will  be  considered  as  being 
composed  of  interest  and  a  proportionate  part  of  the  prin- 
cipal. Where  the  entire  annuity  is  composed  of  an  interest 
return  upon  the  principal  sum  paid  therefor,  the  entire 
annuity  is  income.    (T.  D.  2090) 

Mileage.— The  difference  between  the  amount  re- 
ceived as  mileage  and  the  actual  necessary  expenses  in- 
curred on  a  journey  should  be  included  as  income.  (T.  D. 
2090) 

Comniissions  received  by  a  salesman  are 
income  and  should  be  accounted  for  by  him.     ( T.  D.  2090 ) 

Commissions  on  renewal  insurance  pre- 
miums are  income  when  received  and  for  the  period  in 
which  received,  and  insurance  agents  must  include  such 
commissions  in  computing  their  income.  (T.  D.  2011;  T. 
D.  2090) 


NEW  INCOME  TAX  MANUAL.  f 

Payment  for  surrendering  contract  of 
employment.— Where  an  employee  is  paid  a  sum  equal 
to  two  years'  salary  on  condition  that  he  surrender  his 
contract  of  employment,  such  sum  should  be  included  by 
him  as  a  part  of  his  income.     (T.  D.  2090) 

One  -who  is  furnished  with  living  quarters, 
in  addition  to  salary,  for  his  services,  must  include  as 
income  the  rental  value  of  such  quarters.     (T.  D.  2090) 

Salaries  paid  by  exempt  organizations.— 
Salaries  paid  by  corporations,  etc.,  which  are  exempt  from 
the  income  tax  (See  Sec.  1)  are  subject  to  the  income 
tax,  and  should  be  returned  as  income  by  the  individuals 
to  whom  they  are  paid,  the  corporation  not  being  required 
.to  withhold  the  tax  therefrom,  whatever  the  amount  may 
be.     (T.  D.  2090) 

Payments  to  widows  of  employees.— Where 
the  salary  of  an  employee  is  paid  to  his  widow  for  a  limited 
period  after  his  death  in  recognition  of  the  services  ren- 
dered by  her  husband,  no  services  being  rendered  by  the 
widow,  such  payment  is  considered  a  gratuity  and  she  is 
not  taxable  thereon.     (T.  D.  2090) 

Clergymen  must  include  in  their  taxable  income 
Easter  offerings,  and  fees  received  by  them  for  funerals, 
masses,  marriages,  baptisms,  etc. ;  but  Christmas  gifts  are 
not  considered  income.     (T.  D.  2090) 

An  appreciation  in  the  value  of  assets 
is  not  considered  as  income  until,  as  a  result  of  a  com- 
pleted, closed  transaction,  it  has  been  converted  into  cash 
or  its  equivalent;  that  is,  until  it  has  been  realized  as  an 
addition  to  and  a  part  of  the  tangible  assets  of  the  in- 
dividual. Consequently  mere  book  entries  of  apprecia- 
tion in  the  value  of  capital  assets  may  be  disregarded. 
(Letter  of  Aug.  14,  1914,  to  Internal  Revenue  Collectors 
and  Agents) 

Income  from  legacies.— Legacies  must  be  held  to 
be  vested  rather  than  contingent  unless  this  is  clearly  in- 
consistent with  the  intention  of  the  testator;  and  where 
there  is  a  vested  interest,  the  income  from  such  interest, 
whether  distributed  or  not,  is  subject  to  the  tax.  (T.  D, 
2090) 


8  NEW  INCOME  TAX  MANUAL. 

Dednctions  from  gross  income.— In  comput- 
ing net,  or  taxable  income,  whether  for  the  purpose  of  the 
normal  or  the  additional  tax,  an  individual  is  entitled  to 
deduct  from  his  gross  income  the  following  items  (Par. 
B;a  R.  3,  6;T.  D.  2090)  : 

(1)  The  expenses,  actually  paid,  of  carrying  on  his 
business. 

Premiums  paid  for  insurance  on  property  which  is 
not  occupied  by  the  owner  as  a  dwelling,  but  is  rented  or 
leased  to  secure  an  income,  may  be  deducted.  (T.  D. 
2090) 

A  commission  paid  to  a  real  estate  agent  for  collect- 
ing rents  and  managing  property  is  a  legitimate  business 
expense  and  may  be  deducted  as  such;  and  the  same  is 
true  of  commissions  paid  to  salesmen  as  part  of  the  ex- 
pense of  conducting  business.     (T.  D.  2090) 

It  is  provided  by  T.  D.  2090  that  "taxes  paid  by  a 
tenant  to  (for)  a  landlord  are  considered  as  additional 
payment  for  rent  and  are  deductible  as  an  expense  of 
carrying  on  business."  It  is  obvious  that  this  refers  only 
to  taxes  on  property  occupied  for  business  purposes. 

Where  an  employee  is  required  to  furnish  a  bond  and 
to  pay  the  premium  on  such  bond  as  a  necessary  incident 
of  his  employment,  he  is  entitled  to  deduct  the  premium 
so  paid.     (T.  D.  2090) 

Where  the  salary  of  an  employee  is  paid  to  his  widow 
for  a  limited  period  after  his  death  in  recognition  of  the 
services  rendered  by  her  husband,  no  services  being  ren- 
dered by  the  widow,  such  payment  is  a  gratuity,  and  can- 
not be  deducted  as  an  expense  of  carrying  on  business. 
(T.  D.  2090) 

(2)  The  interest  which  he  has  paid  on  outstanding 
indebtedness. 

(3)  All  taxes  which  he  has  paid,  except  those  as^ 
sessed  against  local  benefits. 

The  provision  for  the  deduction  of  taxes  applies  only 
to  taxes  paid  to  the  United  States,  or  to  some  State  or 
political  subdivision  thereof,  and  hence  taxes  paid  to  a 
foreign  country  cannot  be  deducted.     (T.  D.  2090) 

Taxes  paid  pursuant  to  assessments  levied  by  special 


NEW  INCOME  TAX  MANUAL.  9 

assessment  districts  created  under  the  laws  of  the  several 
states  for  public  purposes,  such  as  the  improvement  of 
streets  and  public  highways,  the  provision  for  sewerage, 
gas,  and  light,  and  the  reclamation,  drainage,  or  irrigation 
of  bodies  of  land,  and  levee  and  school  districts  are  held 
to  be  assessed  against  local  benefits  and  are  not  allowable 
deductions.     (T.  D.  2090) 

(4)  Actual  losses  in  trade,  or  from  fire,  storm,  or 
shipwreck,  which  are  not  compensated  for  by  insurance 
or  otherwise.  For  example,  if  a  stock  of  goods  worth 
$10,000  were  destroyed  by  fire,  the  owner  would  be  en- 
titled to  deduct  that  amount  if  he  had  no  insurance ;  if  he 
was  partly  covered  by  insurance  he  would  be  entitled  to 
deduct  the  difference  between  |10,000  and  the  amount 
which  he  received  from  his  insurance;  while  if  the  loss 
was  fully  covered  by  insurance  he  would  not  be  entitled 
to  any  deduction  whatever. 

Loss  is  defined  as  the  difference  between  selling  price 
and  cost,  where  the  selling  price  is  less  than  cost;  and 
rules  for  ascertaining  the  cost  of  property  are  prescribed. 
(T.  D.  2005) 

In  order  to  be  deductible,  a  loss  must  be  absolute  and 
complete  and  must  have  been  actually  sustained;  it  must 
be  determined  and  ascertained  upon  an  actual,  completed, 
closed  transaction.  So  there  can  be  no  deduction  for  a 
loss  based  upon  a  speculative  or  fluctuating  valuation  of 
a  continuing  investment,  and  a  shrinkage  in  the  value  of 
bonds,  stocks,  and  like  securities,  due  to  fluctuations  in 
their  market  value,  is  not  deductible.  ( T.  D.  2005 ;  T.  D. 
2090) 

It  is  also  necessary  to  authorize  the  deduction  of  a 
loss,  that  it  should  have  been  sustained  "in  trade,"  by 
which  is  meant  the  business  which  engages  one's  time,  at- 
tention, and  labor  for  the  purpose  of  livelihood,  profit,  or 
improvement.  Accordingly,  losses  sustained  through  sales 
of  or  dealings  in  real  or  personal  property,  or  growing 
out  of  the  ownership  or  use  of  or  interest  in  such  property 
are  not  deductible  at  all  unless  they  are  an  incident  of, 
connected  with,  and  grow  out  of  the  business  of  the  in- 


10  NEW  INCOME  TAX  MANUAL. 

dividual  sustaining  the  loss.  (T.  D.  1989;  T.  D.  2005; 
T.  D.  2090) 

A  person  may  engage  in  more  than  one  trade  and  may 
deduct  losses  incurred  in  all  of  them,  but  it  must  be  clearly 
shown  in  such  cases  that  he  is  actually  a  dealer,  or  trader, 
or  manufacturer,  or  whatever  the  occupation  may  be,  and 
is  actually  engaged  in  one  or  more  lines  of  recognized  busi- 
nesses before  losses  can  be  claimed  with  respect  to  either 
or  more  than  one  line  of  business,  and  his  status  as  such 
dealer  must  be  clearly  established.  (T.  D.  2090.  See  also 
T.  D.  1989;  T.  D.  2005) 

Losses  on  stocks,  grain,  cotton,  etc.,  may  be  deducted 
if  they  are  incurred  by  a  person  engaged  in  trade  to  which 
the  buying  and  selling  of  stocks,  etc.,  are  incident  as  a 
part  of  the  business,  as  by  a  member  of  a  stock,  grain, 
or  cotton  exchange.     (T.  D.  2090) 

(5)  Debts  actually  ascertained  to  be  worthless  and 
charged  off  during  the  year. 

The  rules  prescribed  by  the  instructions  on  Form  1040, 
as  issued  for  use  in  making  returns  for  1913,  with  respect 
to  how  the  worthlessness  of  a  debt  must  be  ascertained, 
are  no  longer  in  force,  and  the  present  regulations  merely 
authorize  the  deduction  of  "a  debt  which  has  been  actually 
ascertained  to  be  worthless  and  charged  off  within  the 
taxable  year,"  and  specially  provide  that  in  case  of  default 
upon  installment  payments  on  real  estate,  the  vendor  may 
charge  off  as  bad  debts  "the  amount  of  such  unpaid  install- 
ments less  the  salvage  value  of  the  real  estate  repossessed." 
(T.  D.  2090) 

(6)  A  reasonable  allowance  for  exhaustion  and  wear 
and  tear  of  property  from  use  or  employment  in  business. 
Where  such  allowance  is  made  there  can  be  no  deduction 
for  the  cost  of  restoring  or  making  good  such  exhaustion 
or  wear  and  tear. 

Depreciation  of  farm  buildings,  other  than  a  dwelling 
occupied  by  the  owner,  actually  sustained  within  the  year 
in  excess  of  repairs  made,  is  an  allowable  deduction.  (T. 
D.  2090) 

Actors  and  actresses  are  permitted  to  deduct  the  de- 
preciation of  costumes  purchased  by  them  and  used  ex- 


NEW  INCOME  TAX  MANUAL.  11 

clusively  in  the  production  of  a  play,  arising  from  wear 
and  tear  or  obsolescence  at  the  close  of  the  production, 
provided  such  costumes  are  not  adapted  for  occasional  per- 
sonal use  and  are  not  so  used.     (T.  D.  2090) 

In  computing  net  income  for  the  pnrpose 
of  tlie  normal  tax,  an  individual  may  make  the  fol- 
lowing additional  deductions,  which  are  not  authorized 
with  respect  to  the  additional  tax : 

(7)  Amounts  received  as  dividends  on  stock  or  from 
the  earnings  of  any  corporation,  joint-stock  company  or 
association,  or  insurance  company  which  is  taxable  upon 
its  net  income.     (G.  R.  3) 

Dividends  declared  and  paid  by  a  foreign  corporation 
which  derives  its  entire  income  from  business  done  wholly 
within  the  United  States,  and  pays  a  tax  upon  its  net 
income  under  the  Income  Tax  Law,  should  be  treated  in 
the  same  manner  as  dividends  from  domestic  corporations. 
(T.  D.  2090) 

(8)  The  amount  of  any  income,  the  tax  upon  which 
has  been  paid  or  withheld  for  payment  at  the  source  of 
income.  (G.  R.  3)  But  no  deduction  can  be  made  for  in- 
come received  from  another  where  it  does  not  exceed 
|3,000,  is  not  fixed  or  certain,  or  is  indefinite  or  irregular 
as  to  amount  or  time  of  accrual. 

No  deduction  can  be  made  for  personal,  liv- 
ing, or  family  expenses  (Par.  B),  such  as  expense  for 
medical  attendance,  store  accounts,  family  supplies,  wages 
of  domestic  servants,  or  cost  of  board,  room,  or  house  rent 
for  family  or  personal  use.  Neither  can  any  deduction 
be  made  for  the  cost  of  new  buildings  or  permanent  im- 
provements or  betterments  made  to  increase  the  value  of 
any  property  or  estate  (Par.  B)  or  for  money  or  other 
things  of  value  disposed  of  by  gift,  donation,  or  endow- 
ment.    (T.  D.  1890;  G.  R.  6) 

It  is  also  ruled  that  no  deduction  can  be  made  for 
alimony  paid,  w^hich  is  regai^ded  as  a  personal  expense; 
for  assessments  paid  on  corporate  stock,  which  are  re- 
garded as  an  investment  of  capital;  or  for  premiums  on 
life  insurance  paid  by  the  insured.     (T.  D.  2090) 


12  NEW  INCOME  TAX  MANUAL. 

Government  officers  and  employees,  in  com- 
puting their  income,  must  observe  the  requirements  of 
T.  D.  2079,  which  makes  special  provision  with  respect  to 
amounts  received  as  commutation  of  quarters,  allowance 
for  heat  and  light,  mileage,  reimbursement  for  expenses, 
and  per  diem  allowances  in  lieu  of  subsistence.  See  also 
T.  D.  2090. 

Computation  of  profit  from  sale  of  real 
estate.-In  T.  D.  2005  and  T.  D.  2090,  the  Department 
has  fixed  the  mode  of  computing  profit  from  the  sale  of 
real  estate  as  follows: 

Profit  is  the  difference  between  the  selling  price  and 
the  cost  where  the  selling  price  is  more  than  the  cost. 

Cost  of  property  purchased  prior  to  the  incidence 
of  the  special  excise  tax  (Jan.  1,  1909),  or  the  incidence 
of  the  income  tax  (Mar.  1,  1913),  will  be  the  actual  price 
paid  for  the  property,  including  the  expense  incident  to 
the  procurement  of  the  property  in  the  first  instance  and 
its  sale  thereafter,  together  with  carrying  charges  of  in- 
terest actually  paid,  insurance,  and  taxes  actually  paid 
prior  to  the  incidence  (special  assessments,  if  any,  "ac- 
tually paid"  as  "local  benefits"  in  connection  with  real 
estate) ;  provided  that  where,  up  to  the  incidence  of  the 
tax,  the  expense  of  carrying  property  has  exceeded  the 
income  from  it,  the  difference  between  the  expense  of  car- 
rying and  the  income  from  the  property  shall  be  added 
to  the  purchase  price,  and  the  sum  thus  ascertained  shall 
be  the  cost  of  the  property ;  and  provided  further,  that  in 
the  case  of  property  purchased  prior  to  the  incidence  of 
the  tax  and  sale  thereof  subsequent  to  the  incidence  of  the 
tax,  there  shall  be  excluded  from  consideration  in  ascer- 
taining cost  of  any  items  of  income,  expense,  interest,  and 
taxes  previously  taken  into  account  in  preparing  a  return 
of  annual  net  income. 

The  cost  of  property  acquired  subsequent  to  the  inci- 
dence of  the  tax  will  be  the  actual  price  paid  for  it,  to- 
gether with  the  expense  incident  to  the  procurement  of  the 
property  in  the  first  instance,  and  its  sale  thereafter,  and 
the  cost  of  improvement  or  betterment,  if  any. 

The  entire  profits  realized  by  individuals  or  corpora- 


NEW  INCOME  TAX  MANUAL.  13 

tions  from  the  sale  of  real  estate  will  be  taxable  except 
where  the  property  in  connection  with  which  the  profit  is 
obtained  was  acquired  prior  to  March  1,  1913,  in  the  case 
of  individuals,  or  prior  to  January  1,  1909,  in  the  case  of 
corporations ;  and  then  and  in  such  event  the  profit  will  be 
prorated  over  the  whole  time  the  property  was  held,  and 
that  part  of  the  whole  profit  apportioned  to  the  taxable 
period  will  be  reported  in  annual  returns  of  income.  In 
prorating,  fractional  parts  of  years  will  not  be  considered. 
For  income-tax  purposes,  where  there  is  an  actual 
sale  and  transfer,  profit  will  be  considered  as  realized 
even  though  payment  is  to  be  made  in  installments,  as 
notes  for  deferred  payments  are  secured  by  the  title  to  the 
property  and  presumably  bear  interest  and  are  held  to  be 
worth,  in  cash,  their  face  value. 

The   net   income    of   non-resident   aliens, 

derived  from  property  owned,  or  business  carried  on  in 
the  United  States  is  to  be  computed  according  to  the 
method  provided  for  computing  the  net  income  of  foreign 
corporations,  associations,  etc.  (Par.  B;  G.  R.  8;  T.  D. 
2013)  The  Treasury  Department  has  ruled  that  interest 
on  the  bonds,  and  dividends  on  the  stock  of  domestic  cor- 
porations, owned  by  non-resident  aliens,  are  not  subject 
to  the  income  tax,  whether  such  bonds  or  stock  are  physi- 
cally located  within  or  without  the  United  States.  (T.  D. 
2017) 

§5.  HOW  NET  INCOME  OF  CORPORA- 
TION, ASSOCIATION,  ETC.,  COM- 
PUTED. 

Neither  the  law  nor  any  regulations  now  in  force 
enumerate  the  items  which  constitute  the  gross  income  of 
a  corporation,  the  only  general  provision  on  the  subject 
being  that  net  income  shall  be  ascertained  by  making  cer- 
tain specified  deductions  from  "the  gross  amount  of  the 
income  *  *  *  received  within  the  year  from  all  sources." 
(Par.  G,  subd.  a)  Form  1031  indicates  that  the  gross  in- 
come is  to  be  ascertained  by  adding  together  the  amount  of 
sales  during  the  year  and  the  value  of  stock  on  hand  at 


14  NEW  INCOME  TAX  MANtJAL. 

the  close  of  the  year,  and  deducting  from  the  total  the 
amount  of  purchases  during  the  year  and  the  value  of  the 
stock  on  hand  at  the  beginning  of  the  year. 

An  appreciation  in  the  valne  of  assets  is  not 

considered  as  income  until,  as  a  result  of  a  completed, 
closed  transaction,  it  has  been  converted  into  cash  or  its 
equivalent;  that  is,  until  it  has  been  realized  as  an  addi- 
tion to  and  a  part  of  the  tangible  assets  of  the  corpora- 
tion. (Instr.  Form  1031)  Consequently  mere  book  en- 
tries of  appreciation  in  the  value  of  capital  assets  may  be 
disregarded.  (Letter  of  Aug.  14, 1914,  to  Internal  Revenue 
Collectors  and  Agents) 

Sale  of  capital  assets.— The  profit  or  income  to 
be  returned  in  the  event  of  the  sale  of  capital  assets  should 
be  determined  upon  the  basis  of  the  difference  between 
the  cost  and  selling  price  of  such  assets.  But  the  profit 
may  be  prorated  in  case  the  assets  were  acquired  prior  to 
January  1st,  1909.  (Instr.  Form  1031.  See  also  G.  R. 
108-110 ;  T.  D.  2077)  In  the  event  of  a  sale  of  assets  whose 
increase  in  value  has  been  taken  up  on  the  books,  the 
profit  or  income  to  be  returned  will  be  the  difference  be- 
tween the  cost  and  the  selling  price,  and  book  values  will 
be  ignored  save  as  they  represent  the  actual  cost.  (Letter 
of  Aug.  14,  1914,  to  Internal  Revenue  Collectors  and 
Agents) 

Interest.— A  corporation  must  include  in  its  income 
all  interest  received  on  bonds  or  securities  owned  by  it, 
except  interest  on  the  obligations  of  the  United  States  or 
its  possessions,  or  of  a  State  or  political  subdivision  there- 
of.    (Instr.  Form  1031) 

Rentals.— A  corporation  must  include  as  income  all 
payments  received  in  cash  or  its  equivalent  as  rent  of 
buildings  or  other  property  owned  by  the  corporation. 
(Instr.  Form  1031) 

Dividends.— Dividends  received  upon  the  stock  of 
other  corporations  must  be  included  in  computing  income. 
(T.  D.  2090) 

Parent,  holding,  or  other  corporations,  must  include 
in  their  gross  income,  and  cannot  deduct  therefrom,  any 


NEW  INCOME  TAX  MANUAL.  IS 

dividends  or  share  of  earnings  which  they  may  receive  from 
a  subsidiary,  related,  or  other  corporation ;  and  this  applies 
even  though  the  parent  or  holding  company  owns  all  the 
stock  of  the  subsidiary  company.     (T.  D.  2090) 

Gifts  to  a  corporation  must  be  included  as  income. 
<T.  D.  2090) 

Proceeds  of  insurance  policies  on  the  lives 
of  ofiflcers  and  others,  the  premiums  on  which  have  been 
paid  by  the  corporation,  must  be  returned  as  income  for 
the  year  in  which  such  proceeds  were  received.  (T.  D. 
2090) 

Operation  of  leased  or  purchased  prop- 
erty.—The  computation  of  corporate  income  in  case  one 
corporation  operates  leased  or  purchased  property  of  an- 
other is  provided  for  by  G.  R.  80-82  and  T.  D.  2090. 

Deductions  from  g^ross  income.— The  law  au- 
thorizes a  corporation,  association,  etc.,  to  make  the  fol- 
lowing deductions  from  its  gross  income  (Par.  G,  subd. 
b;  G.  R.  113)  : 

(1)  The  ordinary  and  necessary  expenses  paid  with- 
in the  year  in  the  maintenance  and  operation  of  its  busi- 
ness and  properties,  including  rentals  or  other  payments 
required  to  be  made  as  a  condition  to  the  continued  use  or 
possession  of  property. 

Salaries  of  officers  are  an  allowable  deduction  only  to 
the  extent  to  which  they  represent  reasonable  compensa- 
tion for  services  rendered  as  distinguished  from  compen- 
sation for  capital  invested  in  the  business.  (Instr.  Form 
1031) 

Pensions  paid  to  retired  employees,  or  to  their  fam- 
ilies or  others  dependent  upon  them,  or  on  account  of  in- 
juries received  by  employees,  are  proper  deductions.  (T. 
D.  2090) 

Where  the  salary  of  an  officer  or  employee  is  paid  to 
Ms  widow  for  a  limited  period  after  his  death  in  recog- 
nition of  the  services  rendered  by  her  husband,  no  services 
being  rendered  by  the  widow,  such  payment  is  a  gratuity, 
and  cannot  be  deducted  as  an  expense  of  carrying  on 
t)usiness.     (T.  D.  2090) 


16  NEW  INCOME  TAX  MANUAL. 

Spending  or  treating  money  actually  advanced  by  cor- 
porations to  their  traveling  salesmen  as  part  of  the  expense 
of  selling  the  product  of  such  corporations  may  be  de- 
ducted if  it  is  shown  that  the  money  was  actually  expended 
for  the  purpose  of  selling  such  product.    (T.  D.  2090) 

Rentals  or  other  payments  required  to  be  made  as  a 
condition  to  the  continued  use  or  possession  of  property 
may  be  deducted.  And  where  a  corporation  pays  the  in- 
terest on  a  mortgage  on  property  occupied  or  used  by  it, 
as  a  condition  to  its  possession  or  use,  such  interest  may 
be  deducted.     (Instr.  Form  1031) 

A  corporation  which  pays  premiums  on  insurance  pol- 
icies insuring  the  lives  of  officers  or  others  in  favor  of  the 
corporation  may  deduct  such  premiums.     (T.  D.  2090) 

A  donation  which  legitimately  represents  a  consid- 
eration for  a  benefit  to  the  corporation  as  an  incident  to 
its  business  may  be  deducted.  For  example,  a  corpora- 
tion may  deduct  the  amount  of  a  donation  to  a  hospital 
made  upon  the  consideration  that  employees  of  the  cor- 
poration shall  have  a  ward  for  their  use  in  case  of  accident 
or  illness.    (T.  D.  2090) 

The  reserve  which  banks  in  some  states  are  required 
to  set  aside  and  maintain  as  a  guaranty  of  depositors  in 
the  banks  of  the  state  is  not  an  expenditure  and  cannot 
be  deducted  as  such.  But  the  amounts  actually  expended 
from  such  fund  in  paying  drafts  of  the  state  banking  com- 
missions or  boards  on  such  fund  are  in  the  nature  of  in- 
surance cost,  and  may  be  deducted  as  a  business  expense. 
(T.  D.  2090) 

Where  a  corporation  constructs,  operates,  or  main- 
tains, a  public  utility  under  contract  with  any  city,  state, 
or  territory,  or  the  District  of  Columbia,  under  which  a 
portion  of  the  net  earnings  such  public  utility  is  payable 
to  the  state,  territory,  etc.,  the  amount  so  paid  may  be 
deducted  as  an  expense  of  doing  business.     (T.  D.  2000) 

For  further  rulings  as  to  what  is  or  is  not  properly 
included  in  this  item  of  deduction  see  G.  R.  114-123,  131, 
148;  Instr.  Form  1031. 

(2)  All  losses  sustained  within  the  year  and  not 
compensated  for  by  insurance  or  otherwise,  including  a 


NEW  INCOME  TAX  MANUAL.  17 

reasonable  allowance  for  depreciation  by  use  and  wear 
and  tear  of  property,  if  any. 

In  order  to  be  deductible  a  loss  must  be  absolute  and 
complete,  and  must  have  been  actually  sustained.  (T.  D. 
2005;  2077) 

Loss  is  defined  as  the  difference  between  selling  price 
and  cost,  where  the  selling  price  is  less  than  cost;  and 
rules  for  ascertaining  the  cost  of  property  are  prescribed. 
(T.  D.  2005) 

The  computation  of  losses  must  be  based  upon  the 
difference  between  the  cost  value  and  the  salvage  value 
of  property  or  assets,  including  in  the  latter  value  such 
amount,  if  any,  as  has,  in  current  or  previous  years,  been 
set  aside  and  deducted  from  gross  income  by  way  of  de- 
preciation, and  has  not  been  paid  out  in  making  good 
such  depreciation.     (G.  R.  124) 

Bad  debts  are  proper  deductions  if  charged  off  on  the 
books  during  the  year.  But  if  such  debts  are  subsequently 
collected  they  must  be  treated  as  income.     (G.  R.  125) 

No  deduction  can  be  made  for  reserves  to  take  care  of 
anticipated  or  probable  losses  (G.  R.  126)  or  for  losses 
due  to  the  voluntary  removal  of  buildings,  etc.,  incident  to 
improvements.     (G.  R.  127) 

Losses  arising  from  the  sale  of  capital  assets  are  ar- 
rived at  in  the  manner  prescribed  for  computing  gains 
from  sales  of  capital  assets.    (G.  R.  109,  128;  T.  D.  2077) 

Losses  sustained  through  sales  of  or  dealings  in  real 
or  personal  property,  or  growing  out  of  the  ownership 
or  use  of  or  interest  in  such  property  are  not  deductible 
at  all  unless  they  are  an  incident  of,  connected  with,  and 
grow  out  of  the  business  of  the  corporation.     (T.  D.  2005) 

The  depreciation  which  may  be  deducted  is  the  value 
assigned  to  the  deterioration  of  physical  improvements  or 
assets  which  are  susceptible  of  having  their  value  lessened 
through  wear  and  tear,  use,  or  obsolescence ;  and  a  shrink- 
age in  the  value  of  bonds,  stocks,  and  like  securities,  due 
to  fluctuations  in  their  market  value,  is  not  deductible  as 
depreciation  or  loss.    (T.  D.  2005,  2077;  Instr.  Form  1031) 

In  order  for  a  depreciation  to  be  deductible,  it  must 
be  so  entered  upon  the  books  of  the  corporation  as  to  con- 


18  NEW  INCOME  TAX  MANUAL. 

stitute  a  liability  against  its  assets,  but  where  a  deprecia- 
tion not  so  entered  is  claimed,  and  it  is  found  that  the  de- 
duction claimed  is  a  fair  and  reasonable  measure  of  the 
loss,  revenue  agents  and  examining  officers  may  permit 
the  corporation  to  reopen  its  books  and  make  such  an  en- 
try as  will  authorize  the  deduction.  (Letter  of  Aug.  27, 
1914,  to  Internal  Revenue  Agents) 

The  "reasonable  allowance"  which  may  be  made  is  to 
be  determined  upon  the  basis  of  the  cost  and  probable 
number  of  years  constituting  the  life  of  the  property  with 
respect  to  which  it  is  claimed  (Instr.  Form  1031),  and 
the  fact  that  an  amount  is  written  off  on  the  books  for 
depreciation  is  not  conclusive  that  the  deduction  must  be 
allowed.  (Letter  of  Aug.  27,  1914,  to  Internal  Revenue 
Agents) 

Any  portion  of  book  value  representing  the  value  of 
"good  will"  must  be  eliminated  from  the  calculation  of 
depreciation.  (Letter  of  Aug.  14,  1914,  to  Internal 
Revenue  Collectors  and  Agents) 

For  further  rulings  as  to  depreciation  see  G.  R.  129- 
130,  132-140,  146. 

Under  this  item  mining  companies  may  deduct  a  rea- 
sonable allowance  for  depletion  of  ores  and  other  natural 
deposits  not  to  exceed  5%  of  the  gross  value  at  the  mine 
of  the  output  for  the  year;  and  insurance  companies  may 
deduct  the  net  addition,  if  any,  required  by  law  to  be  made 
within  the  year  to  reserve  funds  and  all  sums  other  than 
dividends  paid  on  iwlicies  and  annuity  contracts.  For 
specific  rulings  as  to  such  corporations  see  G.  R.  141-145, 
147. 

(3)  Interest  accrued  and  paid  within  the  year  on 
outstanding  indebtedness.  But  the  indebtedness  on  which 
interest  is  deducted  must  not  exceed  one-half  of  the  sum 
of  the  interest  bearing  indebtedness  and  the  paid-up  capi- 
tal stock  of  the  corporation  or  association,  or  if  it  has  no 
capital  stock,  the  amount  of  capital  employed  in  the  busi- 
ness. This  means,  in  the  case  of  a  corporation  having 
capital  stock,  that  there  may  be  a  deduction  of  interest 
paid  on  outstanding  indebtedness  "not  exceeding  the  paid- 


NEW  INCOME  TAX  MANUAL.  19 

up  capital  stock  outstanding  at  the  close  of  the  year,  in- 
creased by  the  addition  thereto  of  one-half  of  the  interest- 
bearing  indebtedness  outstanding  at  the  close  of  the  year." 
(T.  D.  1960;  T.  D.  2090)  Accordingly,  a  corporation 
whose  capital  stock  was  |100,000,  and  whose  outstand- 
ing indebtedness  was  |300,000  would  be  entitled  to  deduct 
the  interest  paid  on  |250,000,  this  being  the  sum  of  its 
capital  stock  (|100,000)  and  one-half  of  its  outstanding 
indebtedness  of  1300,000  (|150,000). 

In  this  connection  "paid-up  capital  stock"  means  the 
par  value  of  shares  issued  and  does  not  include  the  surplus 
carried  by  the  corporation.     (T.  D.  2090) 

Foreign  corporations  must  base  their  computation 
upon  the  proportion  of  gross  income  received  from  business 
done,  or  capital  invested  in  the  United  States,  to  entire 
gross  income,  and  may  deduct  interest  paid  on  such  pro- 
portions of  indebtedness,  subject  to  the  limitation  stated. 
(T.  D.  2090) 

Where  there  is  no  capital  stock,  the  amount  of  in- 
terest deductible  is  the  amount  actually  paid  on  an  amount 
of  indebtedness  not  in  excess,  at  any  time  during  the  year, 
of  the  capital  employed  in  the  business  at  the  close  of  the 
year.     (Instr.  Form  1031) 

Where  indebtedness  is  wholly  secured  by  collateral 
subject  to  sale  in  the  ordinary  course  of  the  business  of 
the  corporation,  association,  etc.,  the  total  interest  paid 
on  such  indebtedness  may  be  deducted  as  part  of  the  ex- 
pense of  doing  business.  (Par.  G,  subd.  b;  G.  R.  113)  In 
this  connection  "collateral"  includes  real  estate  or  any 
form  of  physical  or  tangible  property  which  is  bound  for 
the  payment  of  certain  obligations,  and  if  the  corporation 
is,  as  a  matter  of  its  ordinary  business,  engaged  in  buy- 
ing and  selling  or  dealing  in  such  property,  the  interest 
paid  on  indebtedness  wholly  secured  by  mortgage  on  such 
property  may  be  deducted  without  limit  as  to  amount 
This  does  not,  however,  apj)ly  to  property  which  held  for 
the  purpose  of  carrying  on  the  business  of  the  corpora- 
tion and  not  a  subject  of  sale  in  the  ordinary  course  of 
such  business;  and  if  the  same  mortgage  or  indenture 
covers  both  property  which  is  and  property  which  is  not 


20  NEW  INCOME  TAX  MANUAL. 

subject  to  sale  in  the  ordinary  business  of  the  corporation 
the  limit  specified  above  applies  to  the  interest  on  the 
entire  indebtedness  so  secured.     (T.  D.  1993;  T.  D.  2090) 

A  bank,  banking  association,  or  loan  or  trust  com- 
pany is  entitled  to  deduct  interest  paid  within  the  year 
on  deposits  or  on  moneys  received  for  investment  and  se- 
cured by  interest-bearing  certificates  of  indebtedness  issued 
by  such  concern.  But  no  other  corporation  is  entitled  to 
make  such  deduction.     (Instr.  Form  1031) 

For  further  specific  rulings  as  to  deductible  interest 
see  G.  R.  148-151. 

(4)  All  sums  paid  for  taxes  imposed  under  the  au- 
thority of  the  United  States,  or  of  any  State  or  Territory, 
or  imposed  by  the  government  of  any  foreign  country. 
This  includes  local  taxes,  such  as  those  imposed  by  a  city, 
but  not  taxes  for  local  benefits  or  taxes  paid  by  a  corpora- 
tion pursuant  to  a  covenant  in  its  bond.  Neither  can  a 
reserve  for  taxes  be  deducted.     (Instr.  Form  1031) 

Banks  paying  taxes  assessed  against  their  stockhold- 
ers because  of  their  ownership  of  the  shares  of  stock  issued 
by  such  banks,  cannot  deduct  the  amount  so  paid  unless 
they  are  especially  authorized  to  make  such  payments  by 
the  laws  of  the  state  in  which  they  do  business.  (Instr. 
Form  1031) 

For  further  rulings  as  to  taxes  see  G.  R.  152-156,  158. 

The  balance  that  remains  after  deducting  these 
items  from  the  gross  income  is  the  net  income  upon  which 
the  tax  must  be  paid.     (G.  R.  113) 

No  deduction  can  be  made  for  money  or  other 
things  of  value  disposed  of  by  gift,  donation,  or  endow- 
ment (T.  D.  1890;  T.  D.  2090)  except  for  the  benefit  of 
employees  or  their  dependents  (G.  R.  121;  T.  D.  2090),  or 
for  amounts  expended  in  making  permanent  improvements 
or  betterments,  etc.  (G.  R.  118)  Neither  can  dividends 
received  upon  the  stock  of  other  corporations  be  deducted, 
although  such  other  corporations  are  themselves  subject 
to  the  tax.     (T.  D.  2090) 

Bonuses  to  or  sharing  of  profits  "with  em- 
ployees.—Where  increased  compensations,  denominated 


NEW  INCOME  TAX  MANUAL.  21 

bonuses  or  profit  sharing,  are  paid  to  employees  pursuant 
to  a  contract  between  them  and  the  corporation,  such  pay- 
ments may  be  deducted  as  ordinary  and  necessary  ex- 
penses of  operating  the  business.  But  where  there  is  no 
contract  between  the  employer  and  employee  by  reason  of 
which  the  employee  could  enforce  his  claim  for  the  addi- 
tional compensation,  such  payments  are  considered  as 
gratuities,  and  are  not  deductible.  (Letter  of  June  25, 
1914,  to  Alexander  Hamilton  Institute) 

Computation  of  profit  from,  a  sale  of  real 
estate  must  be  according  to  the  rules  prescribed  by  the 
Department  and  which  have  already  been  set  forth  in 
Sec.  4  of  this  book. 

Sales  of  stock.— Where  a  corporation  sells  its  own 
stock  for  either  more  or  less  than  the  par  value,  neither 
the  premium  nor  the  discount  can  be  taken  into  consid- 
eration in  determining  the  net  income  of  the  corporation 
for  the  year  in  which  such  sale  is  made.     (T.  D.  2090) 

Mutual  or  co-operative  companies.— Co- 
operative dairies  may  include  in  their  deductions  from 
gross  income  the  amount  actually  paid  to  members  and 
patrons  for  milk,  but  any  amount  retained  at  the  end  of 
the  year  over  and  above  the  expenditures  must  be  returned 
as  net  income.  So  far  as  it  can  be  made  applicable,  this 
ruling  also  applies  to  mutual  or  co-operative  telephone 
companies,  farmers'  insurance  companies,  and  like  organ- 
izations.   (T.  D.  1996) 

Particular  classes  of  corporations.— Rules 
for  determining  the  gross  and  the  net  income  of  particular 
classes  of  corporations  are  set  out  in  G.  R.  96-107,  112. 

In  the  case  of  a  foreign  corporation,  asso- 
ciation, etc.,  the  taxable  income  is  computed  by  taking 
the  gross  amount  of  its  income  accruing  from  business 
transacted  or  capital  invested  in  the  United  States,  and 
making  practically  the  saiiie  deductions  (with  respect  to 
expenses  and  losses  in  the  United  States)  as  are  provided 
for  in  the  case  of  domestic  corporations,  associations,  etc. 
(Par.  G,  subd.  b.    See  also  G.  R.  157) 


22  NEW  INCOME  TAX  MANUAL. 

§6.      ACCUMULATION  OF  INCOME. 

For  the  purposes  of  the  additional  tax,  the  taxable 
income  of  an  individual  includes  the  share  to  which  he 
would  be  entitled  of  the  gains  and  profits  of  any  corpora- 
tion or  joint-stock  company  or  association,  if  the  same 
were  distributed,  whether  or  not  such  gains  or  profits  are 
actually  distributed,  if  the  corporation,  company,  or  asso- 
<;iation  is  formed  or  fraudulently  availed  of  to  prevent 
the  imposition  of  an  income  tax  by  permitting  the  gains 
or  profits  to  accumulate  instead  of  being  divided  or  dis- 
tributed.    (Par.  A,  subd.  2) 

The  fact  that  the  corporation,  company,  or  associa- 
tion is  a  mere  holding  company,  or  that  the  gains  and 
profits  are  permitted  to  accumulate  beyond  the  reasonable 
needs  of  the  business  is  made  prima  facie  evidence  of  a 
fraudulent  purpose  to  escape  the  income  tax;  but  merely 
permitting  gains  and  profits  to  accumulate  and  become 
surplus  is  not  to  be  taken  as  evidence  of  a  purpose  to 
escape  the  tax  unless  the  Secretary  of  the  Treasury  shall 
certify  that,  in  his  opinion,  such  accumulation  is  unrea- 
sonable for  the  purposes  of  the  business.     (Par.  A,  subd. 

It  is  the  duty  of  such  a  corporation,  company,  or  as- 
sociation, upon  the  request  of  the  Commissioner  of  In- 
ternal Revenue,  to  forward  to  him  a  correct  statement  of 
its  profits  and  of  the  names  of  the  individuals  who  would 
be  entitled  to  such  profits  if  they  were  distributed.  (Par. 
A,  subd.  2) 

§7.      THE  SPECIFIC  EXEMPTION. 

The  Law  provides  that  there  shall  be  deducted  from 
the  amount  of  the  net,  or  taxable,  income  of  each  person 
the  sum  of  $3,000,  with  an  additional  deduction  of  |1,000 
(making  $4,000  in  all)  in  case  the  person  be  married  and 
has  a  wife  or  husband  living  with  him  or  her.  (Par.  C; 
O.  R.  3,  9)  But  only  one  deduction  of  $4,000  can  be  made 
from  the  aggregate  income  of  a  husband  and  wife  who  are 
living  together.     (Par.  C) 


NEW  INCOME  TAX  MANUAL.  23. 

The  status  of  a  person  as  marxried  or  single 

is  determined  as  of  the  time  when  such  person  claims  an 
exemption  if  such  claim  is  made  at  any  time  during  the 
year  (as  in  the  case  of  a  claim  with  respect  to  income  on 
which  the  tax  is  to  be  deducted  at  the  source) ;  otherwise 
the  status  of  the  person  at  the  close  of  the  year  governs, 
(T.  D.  1923;  G.  R.  10) 

Where  husband  and  ivife  are  living  to- 
gether they  are  entitled  to  an  exemption  of  $4,000  and 
no  more  from  the  aggregate  net  income  of  both.  (Par. 
C;  T.  D.  1023;  G.  R  10)  The  return  to  be  made  in  such 
cases  is  discussed  in  Sec.  12. 

Where  hnsband  and  wife  are  separated 
and  living  permanently  apart  each  is  entitled  to  an  ex- 
emption of  $3,000.     (T.  D.  1923;  G.  R.  10) 

Where  either  hnsband  or  -wife  dies  during 
the  year,  his  or  her  executor,  in  making  a  return  for  th& 
decedent,  is  entitled  to  claim  an  exemption  of  $4,000 ;  and 
the  survivor,  when  making  a  return  for  the  entire  year,, 
will  be  allowed  the  exemption  which  is  applicable  accord- 
ing to  his  or  her  married  or  single  status  at  the  end  of 
the  year.     (T.  D.  2090) 

Where  a  tax  is  paid  at  the  sonree  of  in- 
come, but  the  person  for  whom  it  is  paid  has  other  tax- 
able income,  the  fact  that  there  are  separate  returns  and 
payments  does  not  entitle  him  to  a  full  exemption  as  ta 
each,  but  he  is  entitled  to  only  one  deduction  of  $3,000  or 
$4,000  as  the  case  may  be.     (Par.  D) 

Necessity  for  claiming  exemption.— It  is  un- 
likely that  any  person  who  is  required  to  make  a  return 
will  lose  the  benefit  of  the  exemption  to  which  he  is  en- 
titled; but  persons  upon  whose  incomes  the  tax  is  "col- 
lected at  the  source"  are  liable  to  lose  the  benefit  of  their 
exemption  if  they  omit  to  take  the  affirmative  steps  to 
claim  it  which  the  Law  re<iuires,  and  this  may  occur  even 
though  one's  income  is  less  than  $3,000.  (See  Sees.  32- 
37) 

The  specific  exemption  does  not  apply  to 
corporations,  joint-stock  companies  or  associations,  or  in- 


24  NEW  INCOME  TAX  MANUAL. 

surance  companies  (Par.  G,  suM.  a;  G.  R.  160)  or  to  non- 
resident aliens.     (G.  R.  3,  6,  8) 

It  is  held  that  an  American  woman  who  marries  a 
foreigner  takes  the  nationality  of  her  husband  and  cannot 
claim  the  specific  exemption.     (T.  D.  2090) 

No  deduction  for  purpose  of  additional 
tax.— The  mode  of  calculating  the  additional  tax  pre- 
scribed by  Form  1040  clearly  shows  that  the  fixed  exemp- 
tion applies  only  to  the  normal  tax  of  1%. 

§8.  EXEMPTION  OF  COMPENSATION 
OF  PUBLIC  OFFICERS  AND 
EMPLOYEES. 

President  and  United  States  Judges.— No  in- 
come tax  is  to  be  collected  upon  the  salary  or  compensa- 
tion of  the  present  President  of  the  United  States,  for  his 
present  term  of  office,  or  any  United  States  Judge  in 
office  when  the  Law  took  effect.  (Par.  B;  G.  R.  5)  This 
is  not  an  improper  discrimination,  but  merely  "a  recogni- 
tion of  the  constitutional  right  of  such  officers  that  their 
compensation  shall  not  be  reduced  during  their  terms  of 
office.  The  tax  will  be  collected  on  the  salary  or  compen- 
sation of  future  presidents  of  the  United  States  (includ- 
ing the  present  incumbent  should  he  be  re-elected  for  a 
second  term)  and  United  States  Judges  appointed  after 
the  Law  took  effect,  and  also  upon  the  salaries  of  retired 
judges.     (T.  D.  2090) 

Officers  and  Employees  of  States,  Counties, 
Cities,  Etc.— No  income  tax  is  to  be  collected  upon  the 
salary  or  other  compensation  of  officers  or  employees  of  a 
State  or  any  political  subdivision  of  a  State,  unless  such 
salary  or  compensation  is  paid  by  the  United  States.  (Par. 
B ;  G.  R.  5)  This  exempts  from  the  income  tax  all  salaries 
paid  to  an  individual  by  a  State  or  any  political  subdivi- 
sion thereof,  including  the  salaries  of  State,  county,  and 
municipal  officers,  the  salaries  of  public-school  teachers, 
and  special  compensation  paid  by  States  or  subdivisions 
thereof  for  professional  services,  whether  in  the  shape  of 
salaries  or  special  fees.     (T.  D.  1890;  G.  R.  5) 


NEW  INCOME  TAX  MANUAL.  25 

Application    of    exemption    to    additional 

tax.— This  exemption,  being  a  recognition  of  a  lack  of 
power  in  the  United  States  to  tax  these  salaries,  etc.,  must 
be  taken  to  apply  to  the  additional  as  well  as  the  normal 
tax. 

§9.      EXEMrTION    OF    INTEREST     UPON 
PUBLIC  SECURITIES,   ETC. 

The  law  expressly  provides  that  in  computing  net  in- 
come for  the  purposes  of  the  tax  "the  interest  upon  the 
obligations  of  a  State  or  any  political  subdivision  there- 
of, and  upon  the  obligations  of  the  United  States  or  its 
possessions"  shall  be  excluded.  (Par.  B.  See  also  G.  R. 
5,  37) 

Political  subdivisions  of  a  State  include  cities,  coun- 
ties, towns,  villages,  school  districts,  and  the  like,  and  in- 
terest upon  the  obligations  of  all  of  these  is  exempt.  Local 
assessment  districts  are  also  held  to  be  political  subdivi- 
sions of  a  State  so  that  interest  upon  their  obligations  is 
exempt.    ( T.  D.  1946 ;  T.  D.  2090 ) 

Application    of    exemption    to    additional 

tax.— This  exemption,  being  a  recognition  of  a  lack  of 
power  in  the  United  States  to  tax  the  interest  upon  such 
securities,  must  be  taken  to  apply  to  the  additional  as 
well  as  the  normal  tax. 

Securities  owned  by  corporations,  associa- 
tions, etc.— This  exemption  applies  to  securities  which 
are  owned  by  corporations,  associations,  etc.,  as  well  as 
to  securities  owned  by  individuals.  (See  Instr.  Forms 
1030,  1031) 

Assumption  of  mortgage  by  mnnicipality.— 

Where  a  municipality  purchases  a  public  utility  subject 
to  a  mortgage,  the  mortgage  retains  its  original  character, 
even  though  the  municipality  assumes  the  mortgage  indebt- 
edness and  pays  the  interest  thereon,  and  the  indebtedness 
secured  by  such  mortgage  does  not  become  an  obligation 
of  the  municipality  in  such  sense  as  to  be  exempt  from  the 
income  tax.     (T.  D.  2090) 


26  NEW  INCOME  TAX  MANUAL. 

§  10.      EXEMPTION  OF  INCOME  I>ERIVEI> 
FROM  PUBLIC   UTILITIES,   ETC. 

The  tax  imposed  on  corporations,  associations^  etc., 
does  not  apply  to  any  income  derived  from  any  public 
utility  or  from  the  exercise  of  any  essential  governmental 
function,  accruing  to  any  State  or  Territory,  or  the  Dis- 
trict of  Columbia,  or  any  political  subdivision  of  a  State 
or  Territory  or  the  District  of  Columbia,  or  to  any  in- 
come accruing  to  the  government  of  the  Philippine  Islands 
or  Porto  Rico,  or  of  any  political  subdivision  of  the  Philip- 
pine Islands  or  Porto  Rico.    (Par.  G,  subd.  a;  G.  R.  93) 

Where  any  State  or  Territory,  or  the  District  of 
Columbia,  or  any  political  subdivision  of  a  State  or  Ter- 
ritory, has,  before  the  passage  of  the  Income  Tax  Law, 
entered,  in  good  faith,  into  any  contract  with  any  per- 
son or  corporation  for  the  purpose  of  acquiring,  construct- 
ing, operating,  or  maintaining  a  public  utility,  no  tax  is 
to  be  levied  on  the  income  derived  from  the  operation  of 
such  public  utility,  where  the  payment  thereof  would  im- 
pose a  loss  or  burden  upon  a  State  or  Territory,  or  the 
District  of  Columbia,  or  a  political  subdivision  of  a  State 
or  Territory.  But  this  provision  is  not  intended  to  confer 
any  financial  benefit  or  exemption  upon  the  person  or  cor- 
poration with  whom  such  contract  was  made,  or  to  relieve 
such  person  or  corporation  from  the  payment  of  a  tax 
upon  any  part  of  the  income  derived  from  the  operation 
of  such  utility  to  which  such  person  or  corporation  may 
be  entitled  under  the  contract.  (Par.  G,  subd.  a;  G.  R. 
93) 

§11.      NECESSITY  FOB   BETUBN. 

The  assessment  of  the  tax  is  to  be  based  upon  state- 
ments or  "returns"  of  income  which  the  Law  requires  to 
be  made  under  regulations  to  be  prescribed  by  the  Com- 
missioner of  Internal  Revenue  and  approved  by  the  Secre- 
tary of  the  Treasury. 


NEW  INCOME  TAX  MANUAL.  27 

§12.      WHO    REQUIRED    TO    MAKE    RE' 
TURN. 

The  Law  requires  a  return  of  net  income  to  be  made 
by  every  individual  subject  to  the  tax  and  having  a  net 
income  of  three  thousand  dollars  or  over  (Par.  D.  See 
also  G.  R.  15) ;  and  by  all  corporations,  joint-stock  com- 
panies and  associations,  and  insurance  companies  subject 
to  the  tax,  regardless  of  the  amount  of  their  net  incoma 
(Par.  G,  subd.  c.    See  also  G.  E.  15) 

The  requirement  as  to  corporations  imposes  upon 
every  corporation,  no  matter  how  closely  related  it  may 
be  to  any  other  corporation,  the  duty  to  make  a  return 
of  net  income  and  to  pay  the  tax  thereby  shown  to  be  due. 
(T.  D.  2090) 

The  fact  that  one  is  not  liable  to  pay  any 
income  tax  does  not  necessarily  exempt  him  from  the 
obligation  to  make  a  return.  Where  one  has  a  net  income 
of  |3,000  or  more,  the  penalty  provided  by  the  law  for 
refusal  or  neglect  to  file  a  return  ( See  Sec.  39 )  will  be  en- 
forced against  him  notwithstanding  the  fact  that  his  net 
income  may  be  less  than  the  exemption  to  which  he  is 
entitled.     (T.  D.  2090) 

Hnsband  and  wife  living  together.-Where 
a  husband  and  wife  living  together  have  separate  estates, 
the  income  of  both  may  be  shown  by  one  return,  which 
should  be  made  by  the  husband,  and  should  show  the 
amount  of  the  income  of  each  of  them  and  their  full  names 
and  address.     (T.  D.  1923;  G.  R.  10) 

The  wife  may,  however,  make  a  return  of  her  own  in- 
come if  she  has  a  separate  estate  managed  by  herself  as 
her  separate  property  and  receives  an  income  of  more 
than  $3,000;  and  in  such  case,  if  the  husband  has  other 
net  income,  making  the  aggregate  of  both  incomes  more 
than  $4,000,  the  wife's  return  should  be  attached  to  the 
return  of  the  husband,  or  his  income  should  be  included 
in  her  return.     (T.  D.  1923;  G.  R.  10) 

If  either  husband  or  wife  has  an  income  of  $3,000  or 
over,  a  return  including  the  incomes  of  both  of  them  must 
be  made,  even    though    their    combined    incomes  do  not 


28  NEW  INCOME  TAX  MANUAL. 

amount  to  $4,000  (T.  D.  1923;  G.  R.  10) ;  but  they  do  not 
pay  any  tax  in  such  case.    ( Par.  C ) 

If  the  aggregate  net  income  of  husband  and  wife  ex- 
ceeds $4,000  a  return  of  their  combined  incomes  must  be 
made,  although  neither  of  them  has  a  separate  income  of 
13,000;  and  in  such  case  they  are  jointly  and  separately 
liable  for  the  making  of  the  return  and  the  payment  of 
the  tax.     (T.  D.  1923;  G.  R.  10) 

Person  receiving  dividends  from  corporate 
stock.— A  person  having  an  income  of  |3,000  or  more, 
\/  but  less  than  |20,000,  part  of  which  is  derived  from  divi- 

dends or  net  earnings  of  corporations,  etc.,  which  are  them- 
selves subject  to  the  tax,  need  not  make  any  return  if  his 
income,  excluding  that  received  from  such  corporate 
sources,  is  less  than  $3,000.     (T.  D.  1945) 

Persons  for  irlioni.  tax  paid  at  sonrce  of  in* 
come.— Where,  in  accordance  with  the  practice  of  collec- 
tion at  the  source  of  income  (see  Sees.  32-37),  a  return  is 
made  and  the  tax  paid  by  one  on  behalf  of  another,  the 
latter  is  not  required  to  make  any  return,  unless  he  has 
other  net  income  besides  that  upon  which  the  tax  is  so 
paid  (Par.  D),  or  is  liable  for  an  additional  tax  (G.  R. 
19),  in  which  cases  he  must  make  a  separate  return. 

A  corporation  transacting  no  business 
within  the  year  must  nevertheless  make  a  return,  as  this 
duty  is  based  upon  corporate  or  associational  existence 
and  not  upon  the  receipt  of  income.     (T.  D.  2090) 

Corporations  ivMcli  are  in  existence  only 
a  part  of  the  year  are  required  to  make  returns. 
In  case  a  corporation  is  dissolved,  its  return  must  cover 
the  period  from  the  beginning  of  the  calendar  year,  or 
of  its  fiscal  year,  if  it  has  designated  a  fiscal  year,  to  the 
date  of  dissolution.    (T.  D.  2090.    See  also  G.  R.  84,  85) 

Persons  having  custody  of  funds  or  prop- 
erty of  others.— Guardians,  trustees,  executors,  admin- 
istrators, agents,  receivers,  conservators,  and  all  persons, 
corporations,  or  associations  acting  in  any  fiduciary  capa- 
city are  required  to  make  and  render  a  return  of  the  net 
Income  of  the  person  for  whom  they  act,  coming  into  their 


NEW  INCOME  TAX  MANUAL.  29 

custody  or  control  and  management,  and  are  generally 
subject  to  all  the  provisions  of  the  Law,  with  reference 
to  returns,  which  apply  to  individuals.  (Par.  D;  T.  D. 
1906;  G.  R.  71)  If  such  a  person  fails  to  make  a  return 
notice  of  failure  will  be  served  upon  him,  but  he  may 
show  that  the  one  for  whom  he  acts  did  not  receive  tax- 
able income.     (G.  R.  18) 

In  this  connection  the  word  "agents"  relates  only  to 
agents  who  act  in  a  fiduciary  capacity.     (T.  D.  2090) 

The  executor  or  administrator  of   one   who 

died  during  the  taxing  year  is  required  to  make  a  return 
for  the  decedent  covering  the  period  from  the  first  of  the 
year  to  the  date  of  his  death.  (G.  R.  17;  T.  D.  2090) 
By  analogy,  it  would  seem  that  where  a  taxable  individual 
dies  after  the  end  of  the  year,  but  before  his  return  has 
been  made  and  filed,  the  duty  of  making  and  filing  such 
return  would  rest  upon  his  executor  or  administrator. 

Persons,  corporations,  etc.,  occupying  posi- 
tions of  source  of  income.— All  persons,  firms,  com- 
panies, copartnerships,  corporations,  joint-stock  com- 
panies or  associations,  and  insurance  companies,  having 
the  control,  receipt,  disposal,  or  payment  of  fixed  or  de- 
terminable annual  or  periodical  gains,  profits,  or  income 
of  another  person  subject  to  the  tax,  are  required  to 
withhold  from  payments  to  such  person  an  amount  equal 
to  the  normal  tax  of  1%  on  such  gains,  profits,  or  income; 
and  to  make  a  separate  and  distinct  return  of  the  income 
of  each  person  from  which  the  tax  is  thus  withheld,  show- 
ing the  name  and  address  of  such  person,  or  stating  that 
the  name  or  address,  or  both,  are  unknown  if  such  is  the 
case.     (Par.  D) 

The  Law  expressly  provides  that  no  return  is  required 
with  respect  to  a  person  whose  income  does  not  exceed 
|3,000  (Par.  D) ;  and  while  the  tax  may  be  "deducted  at 
the  source"  from  income  derived  from  the  obligations  of 
cori)orations,  etc.,  or  from  foreign  sources,  although  the 
total  income  is  less  than  |3,000,  if  the  exemption  be  not 
claimed  (Par.  E),  such  deductions  are  shown  only  by  the 
list  returns   (see  Sec.  19)   of  the  debtor  or  withholding 


30  NEW  INCOME  TAX  MANUAL. 

agent,  and  no  separate  return  is  made  for  the  individual 
from  whose  income  the  tax  is  withheld. 

The  local  representatives  of  non-resident 
aliens  must  make  returns  for  them.  (G.  R.  8;  T.  D. 
2013;  T.  D.  2090) 

A  partnership,  as  such,  is  not  required  to  make 
any  return,  but  may  be  called  upon  for  a  statement  of  its 
profits,  etc.    (See  Sec.  38) 

§13.      TIME  FOB,   MAILING  RETURN, 

An  individual  must  make  his  return  on  or  before 
March  1st  of  each  year  (Par.  D) ;  and  a  corporation,  joint- 
stock  company  or  association,  or  insurance  company  must 
make  its  return  at  the  same  time  (Par.  G,  subd.  c),  un- 
less it  has  designated  some  day  other  than  Dec.  31st  as 
the  closing  of  its  fiscal  year  (see  Sec.  26),  in  which  case 
its  return  must  be  made  within  sixty  days  after  the  clos- 
ing of  the  fiscal  year.  (Par.  G,  subd.  e)  When  the  date 
on  which  a  return  is  due  falls  on  a  Sunday  or  holiday,  it 
must  be  made  the  next  day.     (G.  R.  176) 

Extension  of  time.— Where  the  failure  to  make  a 
return  is  due  to  sickness  or  absence,  the  Collector  may 
allow  an  extension  of  time,  not  exceeding  thirty  days  (Par. 
I),  provided  application  therefor  is  made  within  the  time 
for  which  the  extension  is  desired.  (G.  R.  23,  173)  Ex- 
cept under  these  circumstances,  no  officer  has  any  discre- 
tion in  respect  to  the  filing  of  returns  or  any  right  to  ex- 
tend the  time.     (T.  D.  1950) 

Withholding  agents  should  not  file  their  returns 
until  after  the  time  allowed  for  claiming  exemptions  and 
deductions.     (G.  R.  33) 

liist  returns  of  debtor  corporations  or 
ixrithholding  agents.— Debtor  corporations  and  with- 
holding agents  are  required  to  file  their  monthly  list  re- 
turns on  or  before  the  20th  day  of  each  month,  and  their 
annual  list  returns  on  or  before  March  1st  of  each  year. 
(T.  D.  1914;  G.  R.  35)  These  returns  are  explained  in 
Sec.  19. 


NEW  INCOME  TAX  MANUAL.  31 

Delay  in  Mails.— Where  a  return  is  mailed,  prop- 
erly addressed  and  postage  prepaid,  in  time  to  reach  the 
Collector  by  the  day  when  it  is  due,  in  the  ordinary  course 
of  the  mail,  no  penalty  attaches  if  delivery  is  delayed. 
(G.  R.  174) 

§14.      TO    TVHOM  RETURN  MADE. 

The  law  requires  that  an  individual  residing  in  the 
United  States  shall  make  his  return  to  the  Collector  of 
Internal  Revenue  of  the  district  where  he  resides  or  has 
his  principal  place  of  business  (Par.  D),  and,  under  G.  R. 
15,  an  individual  residing  in  one  district  and  having  his 
principal  place  of  business  in  another  district,  was  re- 
quired to  make  his  return  for  1913  in  the  district  where 
his  principal  place  of  business  was  located.  This  has, 
however,  been  changed,  and  every  individual  residing  in 
the  United  States,  who  is  required  to  make  a  personal  re- 
turn for  1914  must  make  such  return  in  the  district  where 
he  resides,  regardless  of  where  his  place  of  business  may 
be.  (Instr.  Form  1040;  Letter  of  Dec.  12,  1914,  to  the 
author) 

Return  of  non-resident.— The  return  of  an  indi- 
vidual who  does  not  reside  in  the  United  States  is  re- 
quired to  be  made  to  the  Collector  of  Internal  Revenue  of 
the  district  where  his  principal  business  is  carried  on. 
(Par.  D;  G.  R.  15;  Instr.  Form  1040) 

Retnm  of  corporation,  association,  etc.— 
The  return  of  a  corporation,  joint-stock  company  or  asso- 
ciation, or  insurance  company  must  be  made  to  the  Col- 
lector of  Internal  Revenue  of  the  district  where  its  prin- 
cipal place  of  business  is  located.  (Par.  G,  subd.  c)  The 
principal  place  of  business  means  the  place  or  office  in 
which  the  books  of  account  and  other  data  to  be  used  in 
preparing  the  return  of  annual  net  income  are  ordinarily 
kept.  (T.  D.  2090)  A  foreign  corporation  having  several 
branch  offices  in  the  country  should  designate  one  as  its 
principal  office.     (G.  R.  83) 

Corporations  whose  business  is  done  wholly  in  Porto 
Rico  and  the  Philippine  Islands,  even  though  incorporated 


32  NEW  INCOME  TAX  MANUAL. 

in  the  United  States,  are  held  to  be  resident  corporations 
of  those  possessions,  and  must  make  their  returns  and  pay 
the  income  tax  to  the  Collectors  of  Internal  Revenue  hav- 
ing jurisdiction  there.     (T.  D.  2090) 

Return  of  person  having  cnstody  of  fnnds 
or  property  of  another.— The  law  permits  the  return 
by  a  guardian,  trustee,  executor,  administrator,  agent,  re- 
ceiver, conservator,  or  other  person  acting  in  a  fiduciary 
capacity,  to  be  filed  either  in  the  district  where  such  per- 
son resides  or  in  the  district  where  the  will  or  other  in- 
strument under  which  he  acts  is  recorded.  ( Par.  D )  But 
the  regulations  of  the  Treasury  Department  require  such 
return  to  be  filed  in  the  district  in  which  the  fiduciary  re- 
sides.    (Instr.  Form  1041) 

§15.      FORM  OF  RETURN  GENERALLY, 

The  form  of  return  under  the  Income  Tax  Law  is  to 
be  prescribed  by  the  Commissioner  of  Internal  Revenue 
with  the  approval  of  the  Secretary  of  the  Treasury.  ( Par. 
D ;  Par.  G,  subd.  c )  Those  making  returns  should  be  care- 
ful to  use  the  revised  forms  recently  issued  and  not  the 
forms  issued  for  1913  returns. 

§16.      RETURN  OF  INDIVIDUAL. 

The  law  in  terms  requires  individuals  to  make  re- 
turns "setting  forth  specifically  the  gross  amount  of  in- 
come from  all  separate  sources  and  from  the  total  thereof, 
deducting  the  aggregate  items  or  expenses  and  allowance 
herein  authorized."  (Par.  D)  This  return  must  show 
all  income  from  each  specific  source,  and  the  total;  all 
separate  items  of  deductions;  the  specific  exemption 
claimed;  and  income  on  which  the  tax  has  been  withheld 
at  the  source.     (G.  R.  16) 

A  member  of  a  partnership  must  include  in  his 
annual  return  amounts  due  or  accrued  to  him  from  the 
net  earnings  of  the  partnership,  wliether  api)ortioned  and 
distributed  or  not.     (Par.  D;  G.  R.  11) 

A  later  ruling  expresses  the  same  idea  in  the  following 
language :  "The  income  from  a  partnership  accrues  to  the 


NEW  INCOME  TAX  MANUAL.  33 

individual  partner  at  the  time  his  distributive  interest  is 
determined  and  reducible  to  possession.  In  the  returns  of 
income  made  by  individuals  for  the  calendar  year,  there- 
fore, there  should  be  included  such  income  accruing  from 
the  business  of  partnerships  for  their  business  years  as 
may  have  been  definitely  ascertained  by  means  of  a  book 
balance,  whether  distributed  or  not"    (T.  D.  2090) 

One  ixrlio  is  the  beneficiary  of  a  tmst 
must  show  in  his  return  the  amount  derived  by  him  from 
the  trust  estate  and  from  all  other  sources,  so  that  it  may 
be  ascertained  whether  or  not  he  is  liable  to  an  additional 
tax.     (T.  D.  2090) 

Income  items  not  to  be  included  in  re- 
tnm.— In  stating  gross  income  the  following  items  should 
be  excluded:  (a)  the  value  of  property  acquired  by  gift, 
bequest,  devise,  or  descent;  (b)  the  proceeds  of  life  insur- 
ance policies;  (c)  interest  upon  the  obligations  of  the 
United  States  or  any  of  its  possessions,  or  of  a  State  or 
any  political  subdivision  thereof;  (d)  the  compensation 
of  the  present  President  of  the  United  'States  for  his  pres- 
ent term  and  of  all  United  States  judges  in  office  on  Oct. 
3d,  1913;  and  (e)  the  compensation  of  officers  or  employes 
of  a  State  or  any  political  subdivision  thereof,  unless  paid 
by  the  United  States.  (G.  R.  5.  See  also  T.  D.  1943)  In 
this  connection  some  possible  confusion  or  misunderstand- 
ing may  be  avoided  by  observing  that  the  provision  of  the 
law  is  not  that  such  items  are  to  be  "deducted,"  but  that 
they  are  to  be  "excluded,"  which  means  that  they  are  to 
be  absolutely  disregarded  as  though  they  had  no  existence. 

Income  derived  from  corporations,  etc., 
trliich  are  taxed  on  net  income.— A  person  who  is 
liable  for  the  normal  tax  of  1%  only  (that  is  to  say,  a 
person  whose  net  income  does  not  exceed  |20,000),  whether 
in  his  own  behalf  or  that  of  another,  is  not  required  to 
make  any  return  as  to  income  derived  from  dividends  on 
capital  stock  or  net  earnings  of  corporations,  joint-stock 
companies  or  associations,  or  insurance  companies  which 
are  themselves  taxable  on  their  net  income  (Par.  D),  and 
is  not  required  to  fill  out  the  blank  spaces  for  such  in- 


34  NEW  INCOME  TAX  MANUAL. 

come  appearing  on  Form  1040.  (T.  D.  1945)  But  per- 
sons who  are  subject  to  the  additional  tax  ( that  is  to  say, 
persons  whose  net  income  exceeds  $20,000)  are  required 
to  make  a  personal  return  of  net  income  from  all  sources, 
corporate  or  otherwise.     (Par.  A,  subd.  2;  T.  D.  1945) 

Dividends  from  corporations,  etc.,  are  vested  in  the 
stockholder  on  the  date  on  which  they  are  declared, 
whether  distributed  or  not,  and  regardless  of  the  time 
when  the  surplus  or  undivided  profits  from  which  they 
are  declared  were  earned  and  entered  on  the  books  of  the 
corporation  as  such;  and  such  dividends  should  be  ac- 
counted for  in  full  in  the  return  of  the  individual  for  the 
year  in  which  they  became  due  and  payable,  when  the  in- 
come of  the  individuals  is  such  as  to  require  him  to  return 
income  from  corporate  dividends,  etc.     (T.  D.  2048) 

Stock  dividends,  when  required  to  be  included  in  the 
return,  should  be  accounted  for  at  the  valuation  placed 
upon  the  stock  by  the  corporation  when  the  dividends  were 
declared.     (T.  D.  2090) 

Commissions  not  determinable  until  after 
end  of  year.— A  person  receiving  a  salary  in  excess  of 
$4,000,  and,  in  addition,  a  commission  of  1  per  cent  on 
all  sales,  the  exact  amount  due  on  account  of  commissions 
not  being  determinable  until  February  following  the  year 
in  which  the  commissions  were  earned,  at  which  time  both 
his  salary  for  the  preceding  year  and  his  commissions  are 
I)aid  to  him,  should  return  as  income,  for  the  year  in  which 
payment  was  made,  the  aggregate  amount  received  on  ac- 
count of  salary  and  commissions.    (T.  D.  2090) 

Compensation  for  services  for  a  fixed 
period,  which  is  divided  by  the  end  of  a  taxing  year, 
should  be  accounted  for  in  the  return  for  the  year  in 
which  payment  is  made  and  received.     (T.  D.  2090) 

Wliere  a  service  must  be  completed  be- 
fore payment  is  due,  the  total  amount  of  the  com- 
pensation therefor  should  be  included  in  the  return  for  the 
year  in  which  the  compensation  is  received.     (T.  D.  2090) 

Where  an  individual  is  unable  to  make  his 
own  return,  by  reason  of  minority,  sickness,  or  other 


NEW  INCOME  TAX  MANUAL.  35 

disability,  or  absence  from  the  United  States,  it  may  be 
made  for  him  by  his  duly  authorized  representative.  (G. 
R.  17;  Instr.  Form  1040) 

In  case  of  death,  of  one  whose  income  for  the 
part  of  the  year  during  which  he  lived  was  $3,000  or  over, 
his  executor  or  administrator  must  make  a  return,  and 
may  claim  all  deductions,  and  the  exemption,  to  which  the 
decedent  would  have  been  entitled.  (G.  R.  17;  T.  D.  2090) 
As  to  the  amount  of  exemption  which  may  be  claimed 
where  decedent  was  married  see  Sec.  7. 

Income  from  bonds  guaranteed  free  of 
taxation  is  returned  as  taxed  at  the  source.  (T.  D. 
1942;  T.  D.  1948;  T.  D.  2090) 

Form  of  return.— An  individual  must  use  Form 
1040  (revised)  in  making  his  personal  return.  (T.  D. 
1928 ;  G.  R.  16)  A  specimen  return  made  out  on  this  form 
is  given  in  section  41. 

§  17.      RETURN  OF  CORPORATION,  ASSO' 
CIATION,   ETC. 

The  return  of  a  corporation,  joint-stock  company  or 
association,  or  insurance  company  must  show  (Par.  G, 
subd.  c) : 

(1)  The  total  amount  of  its  paid-up  capital  stock 
outstanding  at  the  close  of  the  year,  or,  if  it  has  no  capital 
stock,  the  total  amount  of  its  capital  employed  in  its  busi- 
ness at  such  time.  The  statement  of  capital  stock  should 
not  include  unissued  or  treasury  stock,  but  only  such  stock 
as  has  actually  been  issued  and  is  outstanding  at  the  close 
of  the  year,  and  for  which  payment  has  been  received. 
Where  the  stock  issued  is  payable  in  installments  or  upon 
assessment,  only  so  much  of  the  capital  as  has  been  actually 
paid  in  upon  such  installments  or  assessments  should  be 
reported  under  this  item.  In  case  no  stock  is  issued  there 
should  be  reported  the  amount  of  capital  actually  em- 
ployed in  the  business  and  property  of  the  corporation  at 
the  close  of  the  year.     (Instr.  Form  1031) 

(2)  The  total  amount  of  its  bonded  and  other  in- 
debtedness at  the  close  of  the  year.    This  should  include 


36  NEW  INCOME  TAX  MANUAL. 

all  interest-bearing  indebtedness  for  the  payment  of  which 
the  corporation  or  its  property  is  bound.  In  case  of  bank- 
ing corporations  and  like  financial  institutions,  deposits 
should  not  be  reported  as  indebtedness  under  this  head. 
(Instr.  Form  1031) 

Where  a  corporation  is  entitled  to  deduct  as  an  ex- 
pense of  doing  business  the  amount  of  interest  paid  on  in- 
debtedness secured  by  collateral  subject  to  sale  in  the  ordi- 
nary course  of  its  business  (See  Sec.  5)  such  interest  must 
be  stated  separately  from  interest  which  is  subject  to  the 
limitation  as  to  amount  indicated  above.     (T.  D.  1993) 

(3)  The  gross  amount  of  its  income  from  all  sources 
for  the  preceding  year;  or,  if  it  is  organized  under  the 
laws  of  a  foreign  country,  the  gross  amount  of  its  income 
received  within  the  year  from  business  transacted  or  capi- 
tal invested  in  the  United  States. 

Interest  received  upon  the  obligations  of  the  United 
States  or  its  jwssessions  or  of  a  State  or  any  political  sub- 
division thereof  must  be  shown  in  the  return  in  a  space 
specially  provided  therefor,  although  not  included  as  in- 
come.    (Instr.  Form  1031) 

(4)  The  total  amount  of  its  ordinary  and  necessary 
expenses,  paid  out  of  earnings  in  the  maintenance  and 
operation  of  its  business  and  properties,  stating  separately 
all  rentals  or  other  payments  required  to  be  made  as  a 
condition  to  the  continued  use  or  possession  of  property. 
If  the  corporation  or  association  is  organized  under  the 
laws  of  a  foreign  country,  the  return  must  show  the 
amount  so  paid  in  the  maintenance  and  operation  of  its 
business  and  properties  in  the  United  States. 

Interest  on  indebtedness  wholly  secured  by  collateral 
which  is  the  subject  of  sale  in  the  ordinary  business  of 
the  corporation  should  be  reported  under  this  heading  as 
an  expense  of  doing  business.     (Instr.  Form  1031) 

(5)  The  total  amount  of  losses  actually  sustained 
throughout  the  year,  and  not  compensated  for  by  insur- 
ance or  otherwise,  stating  separately  any  amounts  al- 
lowed for  depreciation  of  property. 

(6)  The  amount  of  interest  accrued  and  paid  with- 


NEW  INCOME  TAX  MANUAL.  ST 

in  the  year  on  its  bonded  or  other  indebtedness  (such  in- 
debtedness not  to  exceed  one-half  the  sum  of  its  interest- 
bearing  indebtedness  and  its  paid-up  capital  stock  or,  if 
it  has  no  capital  stock,  the  amount  of  its  capital  employed 
in  the  business). 

A  bank,  banking  association,  or  trust  company  must 
state  separately  all  interest  paid  by  it  within  the  year  on 
dei)osits. 

Interest  paid  in  lieu  of  rent  on  a  mortgage  secured 
by  property  which  the  corporation  occupies,  should  not  be 
returned  under  this  heading,  but  should  be  included  as  an 
expense  in  doing  business.     (Instr.  Form  1031) 

Mortgage  indebtedness,  assumed  or  unassumed,  on 
property  to  which  the  corporation  has  taken  or  is  taking 
title,  or  in  which  it  has  an  equity,  or  in  the  acquirement 
of  which  the  mortgage  was  considered  a  part  of  the  pur- 
chase price,  is  held  to  be  a  debt  of  the  corporation  and  in- 
terest paid  on  such  indebtedness  is  deductible  only  under 
this  item.     (Instr.  Form  1031) 

Corporations  should  be  careful  not  to  include  in  this 
item  the  interest  paid  on  indebtedness  wholly  secured  by 
collateral  subject  to  sale  in  the  ordinary  course  of  the  busi- 
ness of  the  corporation,  as  such  interest  is  deductible  as 
an  expense  of  doing  business  and  should  be  so  returned. 
(T.  D.  1993;  Instr.  Form  1031) 

(7)  The  amount  paid  by  it  within  the  year  for  taxes, 
stating  separately  the  amount,  if  any,  paid  for  taxes  im- 
posed by  the  government  of  any  foreign  country. 

(8)  The  net  income  of  the  corporation  or  association 
after  making  the  deductions  allowed  by  law. 

Subsidiary  companies.— A  corporation  having 
subsidiary  companies  must  attach  to  its  return  a  list  of 
such  companies,  with  the  location  of  the  principal  place 
of  business  of  each.     (Instr.  Form  1031) 

Payments  to  officers  and  employees.— A  cor- 
poration is  required  to  show  in  its  return  the  names  of 
officers  and  employees  to  whom  salaries  of  three  thousand 
dollars  or  more  were  paid  during  the  year,  and  the  amount 
paid  to  each.     (Instr.  Form  1031) 


38  NEW  INCOME  TAX  MANUAL. 

Form  of  returns.— For  returns  for  the  year  1914, 
two  forms  only  are  provided,  Form  1030  for  use  by  insur- 
ance companies,  and  Form  1031  for  use  by  all  other  cor- 
porations. The  numerous  forms  prescribed  for  use  by 
various  classes  of  corporations  in  making  their  1913  re- 
turns are  now  superseded. 

§18.      RETURN  OF  FIDUCIARY. 

A  guardian,  trustee,  executor,  administrator,  agent,  re- 
ceiver, conservator,  or  any  person,  corporation,  or  asso- 
ciation acting  in  a  fiduciary  capacity  and  holding  in  trust 
an  estate  of  another  person  or  persons,  is  referred  to  in 
the  regulations  as  the  "fiduciary."     (T.  D.  1906) 

Fiduciaries  are  required  to  make  a  return  on  Form 
1041  whenever  the  interest  of  any  one  beneficiary  in  the 
income  from  the  estate  or  trust  subject  to  the  normal  tax 
is  in  excess  of  $3,000.  This  duty  can  not  be  delegated 
to  another  person.  When  the  interest  of  any  one  bene- 
ficiary exceeds  |3,000  and  a  return  is  required,  the  name 
and  full  address  of  each  beneficiary  and  the  share  of  income 
to  which  he  or  she  is  entitled,  even  though  it  be  less  than 
$3,000,  must  be  shown.     (T.  D.  2090) 

Where  there  are  two  or  more  joint  g:nar- 
dians,  trustees,  executors,  administrators, 
etc.,  the  return  may  be  made  by  any  one  of  them.    (Par. 

D) 

Where  the  fiduciary  is  a  corporation  or 
oi^anization,  the  return  must  be  signed  and  executed 
by  a  duly  authorized  officer  of  such  organization.  (G.  B. 
73;  Instr.  Form  1041) 

Form  and  contents  of  return.-  The  return  of 
a  fiduciary  must  give  an  itemized  statement  of  the  gross 
income  coming  to  his  hands  as  such  fiduciary,  and  the  de- 
ductions claimed  ( T.  D.  1906 ) ,  and  must  be  made  on  Form 
1041,  revised.  (T.  D.  1928)  Such  return  must  also  show 
the  names  and  addresses  of  the  beneficiaries,  and  particu- 
lars as  to  their  respective  interests  in  the  amount  of  in- 
come received  by  the  fiduciary,  the  amount  of  exemption 
claimed  by  each  beneficiary,  the  amount  of  income  of  each 


NEW  INCOME  TAX  MANUAL.  » 

beneficiary  on  which  the  fiduciary  is  liable  for  the  tax, 
and  the  amount  of  tax  withheld,  etc.  (See  T.  D.  1906, 
G.  R.  73) 

Wliat  income  to  be  included.— The  fiduciary  is 
required  to  include  in  the  return  made  by  him  for  the  bene- 
ficiaries only  such  income  as  accrues  and  is  payable 
through  the  fiduciary,  and  not  any  income  which  may 
accrue  to  the  beneficiaries  from  other  sources. 

The  provision  of  T.  D.  1945,  to  the  effect  that  persona 
liable  for  the  normal  tax  only  need  not  show  in  their  re- 
turns any  income  received  from  the  dividends  or  net  earn- 
ings of  corporations,  associations,  etc.,  has  been  extended 
to  cover  returns  by  fiduciaries.     (T.  D.  1947) 

Expenses  of  administration  of  an  estate,  such 
as  court  costs,  attorneys'  fees,  executors'  commissions,  etc., 
are  chargeable  against  the  corpus  of  the  estate,  and  are  not 
allowable  deductions  in  the  return  of  the  fiduciary.  ( T.  D. 
2090) 

Where  tlie  annual  income  is  not  paid  or 
distributed  to  the  beneficiaries  of  the  trust,  the  fidu- 
ciary must  nevertheless  make  an  annual  list  return  show- 
ing the  name  and  address  of  each  beneficiary  whose  dis- 
tributable interest  in  the  income  exceeds  |3,000,  stating 
the  distributive  amount  to  which  each  beneficiary  is  en- 
titled, and  giving  all  information  required  in  list  returns. 
(T.  D.  1906;  G.  R.  74) 

Detailed  instructions  for  the  preparation  of  a 
return  by  a  fiduciary  are  given  in  T.  D.  1943  and  G.  R. 
71,  and  also  on  Form  1041. 

A  fiduciary  acting  for  a  beneficiary  in 
more  than  one  estate  or  trust  is  required  to  ac- 
count for  each  estate  separately,  and  if  the  amount  of  in- 
come from  no  one  estate  exceeds  |3,000  no  return  or  with- 
holding wi.ll  be  required.  Unless  the  beneficiary  is  under 
some  disability  which  requires  the  fiduciary  to  act,  the 
beneficiary  will  make  his  own  return  and  account  for  the 
tax  upon  his  entire  net  income.     (T.  D.  2090) 

Personal  return  by  guardian  for  urard.— 
A  guardian  acting  for  a  single  ward  must  make  a  return 


40  NEW  INCOME  TAX  MANUAL. 

for  such  ward  on  Form  1040,  as  agent  of  the  ward,  and 
not  on  Form  1041.  Where  there  are  two  or  more  wards, 
the  guardian  must  make  a  return  as  fiduciary  on  Form 
1041,  and  a  separate  return  on  Form  1040  for  each  ward 
having  a  net  income  of  P,000  or  more.     (T.  D.  2090) 

Personal  return  for  non-resident  alien 
Ijeneficiary.— A  trustee,  executor,  or  administrator, 
who  represents  a  single  beneficiary,  such  beneficiary  be- 
ing a  nonresident  alien,  must  make  a  return  on  Form  1040 
for  such  beneficiary.  Where  there  are  two  or  more  non- 
resident alien  beneficiaries,  the  fiduciary  must  make  a  per- 
sonal return  for  each  on  Form  1040,  and  in  addition  there- 
to a  return  as  fiduciary  on  Form  1041.  (Instr.  Form 
1041) 

Fiduciary  as  agent  or  attorney.-  A  fiduciary, 
who  is  legally  authorized  to  act  for  the  beneficiary  as 
agent  or  attorney  in  fact  may  make  for  such  beneficiary 
the  personal  annual  return  (Form  1040)  required  by  law. 
(T.  D.  1906;  G.  R.  72) 

§  19.  IjIST  returns  of  person >  COR' 
PORATION,  ETC.,  OCCUPYING 
POSITION  OF  SOURCE  OF  INCOME. 

Debtors  and  withholding  agents  are  required  to  make, 
in  duplicate,  monthly  list  returns  on  or  before  the  20  th 
day  of  each  month,  and  annual  list  returns  on  or  before 
March  1st  of  each  year,  showing  what  has  been  done  in 
respect  to  withholding  the  tax  during  the  preceding  month 
or  year.  (T.  D.  1914;  G.  R.  50)  Certificates  claiming  ex- 
emptions and  deductions  must  accompany  the  list  returns. 
(G.  R.  35) 

Where  coupons  or  interest  orders  are  ac- 
companied by  certificates  of  ownership,  the 
monthly  list  return  of  the  debtor  or  its  fiscal  agent  (Form 
1012)  must  give  a  list  of  all  coupon  or  interest  payments 
on  which  the  normal  tax  was  withheld,  and  show  the  names 
and  addresses  of  the  owners  of  the  bonds,  etc.,  the  amount 
of  the  income  thereon,  the  amount  of  the  exemption 
claimed,  the  amount  of  income  for  the  tax  on  which  the 


NEW  INCOME  TAX  MANUAL.  41 

debtor  or  withholding  agent  is  liable,  and  the  amount  of 
tax  withheld.     (T.  D.  1914) 

Substitute  certificates  of  collecting  agents  (see  Sec. 
34)  which  are  received  by  debtors  or  withholding  agents 
are  to  be  considered  the  same  as  certificates  of  owners  (see 
Sec.  34 ) ,  and  in  making  the  monthly  list  returns,  the  name 
and  address  of  the  collecting  agent  and  the  number  of  the 
substitute  certificate  is  to  be  entered  in  place  of  the  name 
and  address  of  the  owner  of  the  bonds  or  obligations.  (T. 
D.  1914;  G.  R.  51) 

Where  there  is  more  than  one  issue  of  bonds  or  se- 
curities on  which  the  tax  is  withheld,  the  debtor  or  with- 
holding agent  must  make  a  separate  monthly  list  return 
for  each  issue,  and  such  returns  must  be  accompanied  by 
a  further  return  (Form  1012d),  which  is  in  the  nature  of 
a  summary  of  such  separate  returns.     (T.  D.  1914) 

Where  the  owners  of  bonds,  etc.,  are  not  subject  to 
have  the  normal  tax  withheld  at  the  source  (see  Sec.  34), 
no  list  return  is  required  to  be  made  of  certificates  of 
ownership  accompanying  coupons  or  registered  interest 
orders  filed  with  the  debtor  or  withholding  agent,  but  the 
certificates  of  ownership  are  to  be  forwarded  by  the  debtor 
or  withholding  agent  to  the  Collector  of  Internal  Revenue 
of  his  or  its  district  on  or  before  the  20th  day  of  the 
month  succeeding  that  in  which  such  certificates  were  re- 
ceived.   (T.  D.  1914 ;  G.  R.  51) 

The  annual  list  return  (Form  1013)  is  in  the  nature 
of  a  general  summary  of  the  monthly  list  returns,  show- 
ing, for  each  month,  the  total  amount  of  income  from  the 
obligations  of  the  debtor,  the  total  amount  of  the  exemp- 
tions claimed,  the  total  amount  of  income  for  the  tax  on 
which  the  debtor  or  withholding  agent  is  liable,  the  amount 
of  tax  withheld,  the  amount  remitted  to  the  Collector  of 
Internal  Revenue,  and  the  balance  (if  any)  of  tax  due. 
The  monthly  list  returns  form  part  of  the  annual  list  re- 
turn, and  the  latter  is  not'  required  to  show  the  amount 
of  tax  withheld  from  each  person.     (T.  D.  1914;  G.  R.  51) 

WHere  coupons  or  interest  orders  are  not 
accompanied  by  certificates  of  oisrnersliip,  the 


42  NEW  INCOME  TAX  MANUAL. 

withholding  agent  must  file  a  monthly  list  return  (Form 
1044)  giving  a  list  of  all  coupon  or  interest  payments 
made  on  which  the  normal  tax  was  deducted  and  with- 
held and  showing  the  name  and  address  of  the  owner  of 
the  coupons,  or,  if  the  owner  is  not  known,  the  name  and 
address  of  the  person  presenting  them,  the  amount  of  in- 
come subject  to  the  tax,  and  the  amount  of  tax  withheld. 
(G.  R.  53) 

The  annual  list  return  with  respect  to  such  income 
(Form  1044a)  must  show  the  amount  of  tax  withheld 
during  the  preceding  year,  but  as  the  monthly  list  returns 
form  a  part  of  the  annual  list  return,  the  withholding 
agent  is  not  required,  in  maJiing  the  latter  return,  again 
to  make  an  itemized  list  of  the  tax  withheld  from  each 
person,  but  must  give  merely  the  totals  of  the  monthly 
list  returns  for  the  year.     (G.  R.  53) 

Income  arising  in  foreign  countries.— A  per- 
son, firm,  or  corporation  licensed  to  undertake  the  col- 
lection of  income  arising  in  foreign  countries  and  with- 
hold the  tax  thereon  (see  Sec.  36)  must,  each  month,  ob- 
tain the  names  and  addresses  of  the  persons  from  whom 
foreign  items  are  received,  and  prepare  a  list  of  same  in 
duplicate  (on  Form  1043)  and  file  it  with  the  Collector 
of  Internal  Revenue  for  his  or  its  district.  The  list  must 
be  dated  and  must  contain  the  names  and  addresses  of 
the  taxable  persons  and  show  the  character  and  amount  of 
income,  the  amount  of  exemption  claimed,  the  amount  of 
income  on  which  the  withholding  agent  is  liable  for  the 
tax,  and  the  amount  of  tax  withheld.  (T.  D.  1887;  G.  R. 
59) 

The  licensee  must  also  file  with  the  Collector,  in  dupli- 
cate, an  annual  return  (Form  1043a)  showing  the  amount 
of  income  paid  and  the  amount  of  tax  withheld  by  him  dur- 
ing the  preceding  year.  This  return  need  not  be  itemized, 
but  should  give  merely  the  totals  of  the  monthly  list  re- 
turns.    (G.  R.  59) 

Income  other  than  from  corporate  obli- 
gations or  foreign  sources.— A  withholding  agent 
charged  with  withholding  and  paying  the  tax  with  re- 


NEW  INCOME  TAX  MANUAL.  43 

spect  to  income  other  than  from  corporate  obligations 
or  foreign  sources,  must  make  an  annual  list  return  (Form 
1042)  in  duplicate,  to  the  Collector  for  the  district  in 
which  he  or  it  resides  or  has  his  or  its  principal  place 
of  business,  showing  the  names  and  addresses  of  i)ersons 
who  have  received  incomes  in  excess  of  |3,000,  on  which 
•  the  normal  tax  has  been  deducted  and  withheld  during  the 
preceding  year.  This  return  must  be  accompanied  by  all 
forms  presented  claiming  exemptions  or  deductions.  (G. 
R.  69) 

§20.      VERIFICATION   OF  RETURN. 

The  return  of  an  individual  must  be  verified  by  the 
6ath  or  affirmation  of  the  person  by  whom  it  is  rendered 
(Par.  D;  G.  R.  22),  and  the  return  of  a  corporation  or 
association  must  be  verified  by  the  oath  or  affirmation  of 
its  president,  vice-president,  or  other  principal  officer,  and 
its  treasurer  or  other  financial  officer.  (Par.  G,  subd.  c; 
Instr.  Form  1031)  Verification  may  be  before  the  Col- 
lector for  the  district,  or  a  notary  public,  commissioner 
of  deeds,  or  other  officer  authorized  to  administer  oaths. 
(G.  R.  22) 

The  annual  list  returns  of  debtors  and  withholding 
agents  must  be  verified,  but  verification  of  their  monthly 
list  returns  is  not  required.     (T.  D.  1997) 

Where  a  return  is  executed  before  a  notary  who  is  not 
required  by  the  laws  of  the  state  to  use  a  seal,  and  no  seal 
is  used,  the  notary  must  file  with  the  Commissioner  of  In- 
ternal Revenue  the  certificate  of  an  officer  possessing  a 
seal,  showing  that  such  notary  is  duly  commissioned  and 
authorized  to  administer  oaths.  A  return  by  an  individual 
residing  abroad  may  be  acknowledged  before  any  duly  ap- 
pointed officer  of  the  country  in  which  he  resides  author- 
ized to  administer  oaths  and  use  an  official  seal.  Returns 
acknowledged  before  commanding  officers  of  naval  vessels 
while  at  sea  or  in  foreign  ports  will  be  accepted,  but  re- 
turns executed  before  a  summary  court  officer,  United 
States  Army,  will  not  be  accepted.     (T.  D.  2090) 


44  NEW  INCOME  TAX  MANUAL. 

§21.  RETURN  BY  COMMISSIONER  OF 
INTERNAL  REVENUE  FOR 
DELINQUENT. 

Where  an  individual  (Par.  E;  G.  R.  25)  or  a  cor- 
poration, association,  etc.,  (Par.  G,  subd.  c;  G.  R.  177, 
184)  neglects  or  refuses  to  make  a  return,  or  makes  a 
false  or  fraudulent  return,  the  Commissioner  of  Internal 
Revenue  is  required,  upon  the  discovery  of  the  fact,  at 
any  time  within  three  years  after  the  return  was  due,  to 
make  a  return  upon  information  obtained  as  provided 
for  by  the  Income  Tax  Law  or  any  other  existing  law  (G. 
R.  21),  and  the  assessment  made  upon  such  return  must 
be  paid  immediately  upon  receipt  of  notice  of  the  amount 
thereof. 

If  one  consents  to  disclose  the  necessary  facts 
to  a  Collector  or  Deputy-Collector,  such  olBftcer  must  make 
a  return  for  him,  which  when  read  and  consented  to,  signed 
and  verified  by  such  i)erson  may  be  received  as  his  return. 
(G.  R.  20) 

§22.  INCREASING  AMOUNT  SHOWN  BT 
RETURN. 

if  the  Collector  or  Deputy-Collector  has  cause  to  be- 
lieve that  the  amount  of  a  person's  income  is  understated 
in  his  return,  he  must  give  such  person  notice  to  show 
cause  why  the  amount  should  not  be  increased,  and  upon 
proof  of  the  amount  by  which  the  person's  income  has 
been  understated,  he  may  increase  the  amount  stated  bo 
as  to  show  such  person's  true  income.     (Par.  D) 

Appeal  from  decision  of  collector.— A  x>erson 
who  believes  that  he  has  been  compelled  by  the  Collector 
of  Internal  Revenue  to  make  a  return  showing  a  larger 
income  than  he  believes  should  be  shown,  has  the  right 
to  take  the  case  to  the  Commissioner  of  Internal  Revenue. 
(Par.  D) 

%23.  COMPELLING  TESTIMONY  ANB 
PRODUCTION  OF  BOOKS  AND  PA- 
PERS. 

When  any  person  is  summoned  to  appear  and  testify 
or  produce  books  in  respect  to  the  assessment  of  an  in- 


NEW  INCOME  TAX  MANUAL.  45 

come  tax,  the  United  States  District  Court  for  the  district 
within  which  he  resides  has  power  to  compel  him  to  at- 
tend, produce  the  books  called  for,  and  testify.  (Par.  K) 
The  books  of  a  corporation  are  subject  to  examination  by 
revenue  officers.     (G.  R.  186) 

§24.      INSPECTION  OF  RETURNS. 

Returns  made  by  a  corporation,  company,  or  associa- 
tion under  the  Income  Tax  Law  are  public  records,  but 
they  are  open  to  inspection  only  upon  the  order  of  the 
President,  under  rules  and  regulations  to  be  prescribed 
by  the  Secretary  of  the  Treasury  and  approved  by  the 
President.  The  proper  officers  of  a  State  imposing  an 
income  tax  may,  upon  request  of  the  Governor  of  such 
State,  have  access  to  the  returns  and  make  abstracts  there- 
of. (Par.  G,  subd.  d;  G.  R.  178,  179)  This  rule  is  held 
to  apply  also  to  returns  of  individuals.  ( T.  D.  2016 )  An 
executive  order  of  the  President  authorizing  such  inspec- 
tion has  been  made,  and  rules  and  regulations  governing 
such  inspection  have  been  duly  made  and  approved.  (T. 
D.  2016) 

§25.  DISCLOSING  OR  rUBLISHING  IN- 
FORMATION CONTAINED  IN 
RETURNS. 

It  is  unlawful  for  any  officer,  agent,  or  employee  of 
the  United  States  to  divulge  or  make  known  in  any  man- 
ner any  information  which  is  required  to  be  set  forth  in 
the  income  tax  returns,  except  as  provided  by  law,  or  for 
any  person  to  print  or  publish  such  information  in  any 
manner  not  provided  by  law.  (Par.  I;  G.  R.  181;  T.  D. 
1962) 

§26.      TAXING  PERIODS. 

An  income  tax  is  imposed  for  each  year  ending  Dec. 
31st.  This  applies  to  individuals  absolutely  (Par.  D),  and 
to  corporations,  associations,  etc.,  unless  they  have  desig- 
nated some  day  other  than  Dec.  31st  as  the  close  of  their 
fiscal  year.     (Par.  G,  subd.  c) 


46  NEW  INCOME  TAX  MANUAL. 

Designation   of   closing   of   fiscal  year.— A 

corporation  or  association  may  designate  the  last  day  of 
any  month  as  the  closing  of  its  fiscal  year,  and  if  it  does 
so,  each  assessment  is  based  upon  its  net  income  for  the 
fiscal  year  closing  on  the  designated  day  next  preceding 
the  date  of  the  assessment.     (Par.  G,  subd.  c;  G.  R.  165) 

Necessity  for  designation  and  notice.— The 
mere  fact  that  a  corporation  has  ordinarily  kept  its  books 
so  as  to  show  a  day  other  than  Dec.  31st  as  the  closing  of 
its  fiscal  year  is  not  of  itself  sufficient  to  authorize  it  to 
make  returns  and  pay  the  tax  on  the  basis  of  such  fiscal 
year.  In  order  to  have  this  right,  it  must  make  a  formal 
designation  of  the  closing  day  of  its  fiscal  year  and  give 
notice  thereof;  failing  in  which  it  must  make  returns  and 
pay  the  tax  on  the  basis  of  the  calendar  year.  (T.  D. 
1897;  G.  R.  168,  170)  A  return  made  on  the  basis  of  a 
fiscal  year  of  which  designation  and  notice  have  not  been 
properly  made  and  given  will  not  be  accepted,  and  the 
corporation  will  be  notified  of  such  non-acceptance  and 
that  its  return  must  be  made  to  cover  the  business  of  the 
calendar  year.     (T.  D.  1897;  G.  R.  171) 

"BLovr  designation  made.— Tlie  designation  of  a 
time  other  than  Dec.  31st  as  the  closing  of  the  fiscal  year 
must  be  made  by  filing  a  written  notice  of  the  day  desig- 
nated with  the  Collector  of  Internal  Revenue  of  the  dis- 
trict in  which  the  principal  place  of  business  of  the  cor- 
poration or  association  is  located.    (T.  D.  1897 ;  G.  R.  165) 

Tin&e  for  making  designation.—  The  law  pro- 
vides that  the  notice  of  designation  shall  be  filed  by  the 
corporation  "not  less  than  thirty  days  prior  to  the  date 
upon  which  its  annual  return  should  be  filed."  (Par.  G, 
Bubd.  c)  This  is  construed  to  mean  that  the  notice  must 
be  filed  not  less  than  thirty  days  prior  to  March  1st  of  the 
year  in  which  the  fiscal  period  of  twelve  months  closes. 
Thus  a  corporation  desiring  to  establish  its  fiscal  year  as 
ending  on  June  30th,  1915,  would  be  required  to  file  its 
notice  on  or  before  Jan.  29th,  1915.  (T.  D.  2001,  T.  D. 
2029;  T.  D.  2090) 

Mode  of  change  from  calendar  to  fiscal 
year.— When  a  corporation  changes  from  a  calendar  to 


NEW  INCOME  TAX  MANUAL.  47 

a  fiscal  year,  a  return  for  that  portion  of  the  calendar  year 
preceding  the  commencement  of  the  fiscal  period  of  twelve 
months  must  be  filed  on  or  before  March  1st  of  the  year 
following  the  calendar  year  of  which  it  is  a  part,  and  the 
return  for  the  full  fiscal  year  must  be  filed  within  sixty 
days  after  the  close  of  such  fiscal  year.  Thus  if  a  cor- 
poration should  designate  June  30th,  1915,  as  the  close  of 
its  fiscal  year,  it  would  be  required  to  file,  on  or  before 
March  1st,  1915,  a  return  covering  the  period  from  Jan. 
1st  to  June  30th,  1914 ;  and  a  return  for  the  first  fiscal  year 
period  (July  1st,  1914,  to  June  30th,  1915)  would  have 
to  be  filed  on  or  before  Aug.  29th,  1915.  Thereafter  the 
returns  would  be  made  between  July  1st  and  Aug.  29th 
of  each  year  on  the  basis  of  a  fiscal  year  ending  June  30th. 
(T.  D.  2001;  T.  D.  2029;  T.  D.  2090) 

§27.      ASSESSMENT  OF  TAX. 

The  tax  to  be  paid  by  each  person  is  to  be  assessed  by 
the  Commissioner  of  Internal  Revenue.  (Par.  E;  G.  R. 
25) 

§28.      NOTICE  OF  ASSESSMENT. 

Each  person  (Par.  E;  G.  R.  25)  or  corporation,  asso- 
ciation, etc.  (Par.  G,  subd.  c;  G.  R.  177)  against  whom  or 
which  a  tax  has  been  assessed  is  to  be  notified  of  the 
amount  for  which  he  or  it  is  liable  on  or  before  June  1st 
of  each  year. 

§29.      Br     AND     TO     WHOM     TAX     PAID 
GENERALLY. 

Ordinarily,  the  income  tax  will  be  paid  directly  by 
the  person,  corporation,  or  association,  upon  whom  or 
which  it  is  imposed ;  but  an  important  exception  to  this, 
so  far  as  individuals  are  concerned,  arises  out  of  the  pro- 
visions of  the  Law  as  to  '^collection  at  the  source  of  in- 
come."    (See  Sees.  32-37) 

The  tax  is  paid,  in  the  case  of  an  individual,  to  the 
Collector  of  Internal  Revenue  for  the  district  in  which 
such  individual  resides,  or  in  the  case  of  a  nonresident, 


48  NEW  INCOME  TAX  MANUAL. 

to  the  Collector  of  the  district  where  he  has  his  principal 
place  of  business;  and  a  corporation,  association,  etc.,  pays 
to  the  Collector  of  Internal  Revenue  of  the  district  where 
its  principal  place  of  business  is  located. 

The  responsible  heads,  agents,  or  representatives  of 
nonresident  aliens,  who  are  in  charge  of  the  property- 
owned  or  business  carried  on  within  the  United  States 
by  such  aliens,  must  pay  any  and  all  tax,  normal  and  addi- 
tional, assessed  upon  the  income  of  such  aliens.  (T.  D. 
2090) 

§30.      TIME  ANJ>  MODE  OF  PAYMENT. 

The  tax  is  payable  on  or  before  June  30th  of  each 
year  (Par.  E;  G.  R.  25)  and  payment  may  be  made  in 
cash  or  by  certified  checks  drawn  in  favor  of  the  Collector 
of  Internal  Revenue  on  national  and  state  banks  and  trust 
companies  located  in  the  city  where  the  oflSce  of  the  Col- 
lector is  located,  or  by  such  "out  of  town"  certified  checks 
as  the  Collector  can  cash  without  cost  to  the  government. 
(T.  D.  1990) 

A  corporation  must  pay  its  tax  on  June  30th,  the 
same  as  an  individual,  unless  it  has  designated  a  day  other 
than  Dec.  31st  as  the  closing  of  its  fiscal  year,  in  which 
case  it  must  pay  its  tax  one  hundred  and  eighty  days  after 
such  closing  day.     (Par.  G,  subd.  c;  G.  R.  177) 

A  witliliolding  agent  should  not  forward  the 
amount  withheld  until  after  the  time  for  filing  claims  for 
exemptions  or  deductions  has  expired.     (T.  D.  1965) 

Where  a  return  is  made  by  the  Commis- 
sioner of  Internal  Revenue  because  of  the  neglect 
or  refusal  of  a  person  (Par.  E;  G.  R.  25)  or  corporation, 
association,  etc.  (Par.  G,  subd.  c;  G.  R.  177),  to  make  a 
return,  or  because  of  the  false  or  fraudulent  character  of 
the  return  made,  the  tax  assessed  upon  such  return  must 
be  paid  immediately  upon  receiving  notice  of  the  assess- 
ment. 

Penalty  for  delay  in  paynient.—  Where  a  tax 
or  any  part  thereof  due  from  an  individual  (Par.  E;  Q. 
R.  25)  or  from  a  corporation,  association,  etc.   (Par.  G, 


NEW  INCOME  TAX  MANUAL.  49 

subd.  c;  G.  R.  177)  is  not  paid  when  due,  and  it  is  not 
paid  within  ten  days  after  notice  and  demand  for  pay- 
ment by  the  Collector  of  Internal  Revenue,  five  per  cent 
is  to  be  added  to  the  amount  unpaid,  and  interest  is 
charged  on  the  amount  unpaid  at  the  rate  of  one  per  cent 
a  month  from  the  time  when  the  tax  became  due.  This 
does  not,  however,  apply  to  amounts  due  from  the  estates 
of  insane,  deceased,  or  insolvent  persons.     (Par.  E) 

§31.      RECEIPT  FOR  PAYMENT. 

The  Collector  of  Internal  Revenue  is  required  to  give 
receipts  for  taxes  paid.  One  paying  the  tax  for  others  is 
entitled  to  a  separate  receipt  for  each  tax  so  paid,  which 
receipt  justifies  him  in  withholding  the  amount  so  paid. 
He  may  be  required  to  surrender  this  receipt  to  the  per- 
son for  whom  the  tax  was  paid  if  the  latter  gives  him  a 
written  receipt  for  the  entire  amount  due,  including  the 
tax  so  paid  and  withheld.    (Par.  J) 

§32.      COLLECTION  AT  THE  SOURCE  OF 
INCOME  GENERALLY. 

All  persons,  firms,  copartnerships,  companies,  corpo- 
rations, joint-stock  companies  or  associations,  and  insur- 
ance companies,  in  whatever  capacity  acting,  including 
lessees  or  mortgagors  of  real  or  personal  property,  trus- 
tees acting  in  any  trust  capacity,  executors,  administra- 
tors, agents,  receivers,  conservators,  employers,  and  officers 
or  employees  of  the  United  States,  who  have  the  control, 
receipt,  custody,  disposal,  or  payment  of  interest,  rent, 
salaries,  wages,  premiums,  royalties,  taxable  annuities, 
compensation,  remuneration,  emoluments,  or  other  fixed 
or  determinable  annual  gains,  profits,  or  income  of  an- 
other person,  exceeding  |3,000  for  any  year,  other  than 
dividends  on  capital  stock,  or  shares  in  the  net  earnings 
of  corporations  or  joint-^tock  companies  or  associations 
which  are  subject  to  the  tax,  and  who  are  required  to  make 
a  return  on  behalf  of  another  (see  Sec.  12),  are  authorized 
and  required  to  deduct  and  withhold  from  such  gains, 
profits,  and  income  an  amount  sufficient  to  pay  the  normal 


50  NEW  INCOME  TAX  MANUAL. 

tax  of  1%  thereon,  and  to  pay  over  the  same  to  the  Col- 
lector of  Internal  Eevenue,  and  are  personally  liable  for 
such  amount.  (Par.  E;  G.  R.  30,  64)  Such  persons,  cor- 
porations, etc.,  are  referred  to  as  "debtors"  or  "withhold- 
ing agents."    (G.  R.  31) 

Agents  have  no  responsibility  with  respect  to  with- 
holding the  tax  upon  income  paid  over  by  them  to  their 
principals,  where  such  principals  are  citizens  or  residents 
of  the  United  States ;  but  agents  of  nonresident  aliens  are 
required  to  pay  the  tax  for  them.     (T.  D.  2090) 

Tlie  "source  of  income"  means  the  place  where 
the  income  originates.     (T.  D.  1890 ;  G.  R.  31) 

Amonnt  on  whicli  tax  paid — Necessity  for 
claiming  exemptions  and  deductions.— The  nor- 
mal tax  of  1%  must  be  retained  and  paid  over  as  to  the 
entire  amount  received  for  or  payable  to  another,  unless 
such  other  tiles  with  the  person  required  to  withhold  and 
pay  the  tax,  at  least  thirty  days  before  March  1st  of  each 
year,  a  statement  claiming  his  exemption  of  |3,000  (or 
$4,000  as  the  case  may  be),  in  which  case  the  tax  is  re- 
tained and  paid  over  only  as  to  the  excess  over  such  ex- 
emption. One  who  has  failed  to  give  notice  of  his  exemp- 
tion may,  however,  apply  for  a  refund  of  the  tax  paid  on 
his  exempt  income.     (Par.  E;  G.  R.  33) 

If  a  person  for  whom  the  tax  must  be  retained  and 
paid  by  another  claims  any  other  deductions  from  net  in- 
come, he  must  either  file  a  statement  of  his  annual  gains, 
profits,  and  income  from  all  other  sources  and  of  such 
claimed  deductions  with  the  one  required  to  withhold  and 
pay  the  tax,  at  least  thirty  days  before  March  1st  of  each 
year  ( which  statement  becomes  a  part  of  the  return  to  be 
made  in  his  behalf  by  such  other),  or  apply  to  the  Col- 
lector of  Internal  Revenue  (who  should  notify  the  with- 
holding agent  of  the  application),  at  least  thirty  days  be- 
fore March  1st,  for  such  deductions.     (Par.  E;  G.  R.  33) 

Amonnt  of  tax  to  be  paid  at  source  of  in- 
conie.—  The  provisions  as  to  collection  at  the  source  of 
income  relate  only  to  the  normal  tax  of  1%,  and  any  addi- 
tional tax  is  assessed  upon  a  return  made  by  the  individ- 


NEW  INCOME  TAX  MANUAL.  51 

ual,  and  paid  directly  by  the  individual.     (Par.  E;  G.  R. 
29) 

Income  of  corporations,  etc.— The  provisions 
of  the  Law  with  respect  to  the  deduction  and  payment  of 
the  tax  at  the  source  of  income  apply  only  to  the  normal 
tax  imposed  on  individuals.  (Par.  E)  Accordingly  in- 
terest, rent,  etc.,  accruing  to  a  corporation,  joint-stock  com- 
pany or  association,  or  insurance  company  must  be  paid 
in  full  by  the  one  from  whom  it  is  due  without  any  de- 
duction for  the  income  tax,  regardless  of  whether  the 
amount  be  great  or  small. 

Income  of  partnerships.— The  provisions  of  the 
Income  Tax  Law  with  respect  to  the  deduction  and  pay- 
ment of  the  tax  at  the  source  of  income  are  held  not  to 
apply  to  the  income  of  partnerships  as  such.     (T.  D.  1957) 

Interest  on  deposits  in  banks,  etc.— Banks, 
bankers,  trust  companies,  and  other  banking  institutions 
receiving  deposits  of  money  are  not  required  to  withhold 
the  normal  tax  of  1%  on  the  interest  paid,  accrued,  or 
accruing  to  depositors,  whether  on  open  accounts  or  on 
certificates  of  deposit,  but  all  such  interest,  whether  paid, 
or  accrued  and  not  paid,  must  be  included  in  his  return 
by  the  person  entitled  to  receive  it.  (T.  D.  1893;  G.  R. 
€7) 

Alimony  is  regarded  as  fixed  and  determinable  in- 
come, and  the  tax  thereon  must  be  withheld  by  the  person 
by  whom  it  is  paid,  where  the  amount  exceeds  |3,000.  (T. 
D.  2090) 

Where  profits  are  distributed  to  an  em~ 
ployee  by  a  corporation,  and  the  aggregate  of  such  profits 
and  the  employee's  salary  exceeds  |3,000,  the  normal 
tax  should  be  deducted  and  withheld  therefrom.  (T.  D. 
2090) 

Payment  for  surrendering  contract  of  em- 
ploy ment.— Where  an  employee  is  paid  a  sum  equal  to 
two  years'  salary  on  condition  that  he  surrender  his  con- 
tract of  employment,  and  the  sum  paid  exceeds  f 3,000,  the 
normal  tax  should  be  withheld  therefrom.     (T.  D.  2090) 

Paynicnts  to  government  ofBLcers  and  em- 
ployees in  connection  with  quarters,  heat  and  light,  mile- 


52  NEW  INCOME  TAX  MANUAL. 

age,  reimbursement  for  expenses,  and  allowances  in  lien 
of  subsistence  are  not  subject  to  withholding  as  "fixed  or 
determinable  annuals  or  periodical  gains,  profits,  and  in- 
come."   (T.  D.  2079;  T.  D.  2090) 

Pay  of  officers  and  enlisted  men.—Where 
officers  and  enlisted  men  are  entitled  to  foreign  service 
pay,  aids'  pay,  and  pay  for  certificate  of  merit,  such  items 
of  income  are  considered  as  fixed  and  determinable  and 
subject  to  the  withholding  provisions  of  the  Income  Tax 
Law.    (T.  D.  2090) 

Corporations,  associations,  etc.,  not  re- 
quired to  ivitlUiold  tax.— The  corporations,  associa- 
tions, etc.,  which  are  exempt  from  the  income  tax  (See 
Sec.  1)  are  also  exempt  from  the  duty  of  withholding  the 
tax  from  amounts  which  they  receive  for  or  pay  to  others^ 
and  are  subject  to  none  of  the  obligations  or  requirements 
imposed  on  withholding  agents.  (T.  D.  1967;  T.  D.  2090) 
They  are,  however,  required  to  receive  from  the  holders  of 
their  bonds,  to  whom  interest  payments  are  made,  certifi- 
cates of  ownership,  which  must  be  forwarded  to  the  Col- 
lector of  the  district  in  which  the  particular  organization 
is  located;  but  no  tax  will  be  withheld,  and  no  formal 
report  of  interest  or  other  payments  made  will  be  required. 
(T.  D.  2090) 

Form  of  certificates.-On  May  2d,  1914,  the 
Treasury  Department  issued  a  new  set  of  forms  for  use 
in  connection  with  the  collection  of  the  tax  at  the  source 
of  income.  The  certificates  theretofore  used  were  exten- 
sively revised,  and  in  a  number  of  instances  entirely  super- 
seded. (T.  D.  1976)  But  certificates  executed  prior  to 
Oct.  Ist,  1914,  on  the  old  forms  may  be  accepted.  (T.  D. 
2020)  In  discussing  the  methods  of  collection  at  the 
source  (Sees.  34-37)  all  references  are  to  the  new  forms. 

Color  of  certificates.— The  regulations  require, 
in  respect  to  the  certificates  used  in  connection  with  the 
collection  of  the  tax  at  the  source  of  income,  that  all  cer- 
tificates claiming  exemption  shall  be  on  yellow  paper,  all 
certificates  not  claiming  exemption  on  white  paper,  and 
certificate  Form  1002,  for  use  by  the  first  bank  or  collect- 
ing agency,  on  green  paper.     (T.  D.  1976) 


NEW  INCOME  TAX  MANUAL.  S$ 

Filing   of   certificates  by   attorneys.  —  For 

income  tax  purposes,  a  person  holding  a  power  of  attorney 
from  another  is  authorized  to  file  any  certificate  which  hi» 
principal,  as  such,  would  be  entitled  to  file.  (T.  D.  2090) 
Stamp  tax  on  certificates.- The  stamp  tax  im- 
posed by  the  War  Kevenue  Tax  Act  of  Oct.  22d,  1914,  does 
not  apply  to  certificates  in  connection  with  the  income  tax, 
where  such  certificates  are  required  only  by  the  regula- 
tions and  not  by  the  Income  Tax  Law  itself.    (T.  D.  2049) 

§33.      ITEMS     ON     WHICH     TAX     NOT 
WITHHELH  AT   THE  SOURCE. 

No  tax  is  to  be  withheld  at  the  source  on : 
--  (1)  Dividends  on  the  capital  stock,  or  from  the  net 
earnings  of  corporations,  joint-stock  companies  or  asso- 
ciations, or  insurance  companies  which  are  subject  to  the 
tax.  (T.  D.  1890;  G.  R.  32)  Such  dividends  are  not  sub- 
ject to  the  normal  tax  as  against  the  person  receiving  them. 
(See  Sec.  4) 

(2)  Proceeds  of  life  insurance  policies  paid  upon  the 
death  of  the  person  insured,  or  payments  made  by  or 
credited  to  the  insured,  on  life  insurance,  endowment,  or 
annuity  contracts,  upon  the  return  thereof  to  the  insured 
at  the  maturity  of  the  term  mentioned  in  the  contract,  or 
upon  the  surrender  of  the  contract  (T.  D.  1890;  G.  B. 
32)  Such  items  are  not  included  as  income  within  the 
meaning  of  the  law.  (See  Sec.  4)  Where,  however,  an 
insurance  company  pays  interest  income  to  the  beneficiary 
under  a  policy,  it  is  required  to  withhold  and  pay  over 
the  normal  tax  of  1%  thereon.     (T.  D.  1890) 

(3)  Income  of  an  individual  which  is  not  fixed  or  cer- 
tain, and  payable  at  stated  periods,  or  is  indefinite  or 
irregular  as  to  amount  or  time  of  accrual.  This  applies 
to  the  income  which  farmers,  merchants,  agents  compen- 
sated on  the  commission  b^sis,  lawyers,  doctors,  authors, 
inventors,  and  other  professional  persons  derive  from  fol- 
lowing their  professions  or  vocations.  Thus  when  a  lawyer 
receives  a  retainer  of  $5,000  as  a  special  fee,  the  payer  is 
not  required  or  entitled  to  make  any  deduction  therefrom 


34  NEW  INCOME  TAX  MANUAL. 

for  the  tax.  Such  persons  must  make  a  personal  return 
of  all  their  income  and  pay  the  tax  thereon,  provided,  of 
course,  that  the  income  exceeds  the  fixed  exemption.  It  is 
otherwise,  however,  where  such  a  person  receives  a  fixed 
or  certain  income  from  another,  payable  at  stated  periods, 
as  in  such  ease  the  payer  must  deduct  the  tax.  For  ex- 
ample, if  a  lawyer  is  employed  under  a  retainer  of  1 5,000 
per  year,  payable  yearly,  quarterly,  monthly,  or  at  other 
stated  periods,  the  payer  must  withhold  and  pay  over  the 
normal  tax  on  that  amount,  or  so  much  thereof  as  exceeds 
the  fixed  exemption  claimed  with  respect  thereto  (T.  D. 
1890;  G.  R.  32),  and  obviously  the  same  is  true  where  a 
lawyer,  doctor,  author,  etc.,  is  employed  by  another  at  a 
fixed  salary. 

The  tax  should  not  be  withheld  on  commissions  paid 
to  a  salesman  where  they  are  indefinite  as  to  amount  and 
time  of  accrual,  nor  are  payments  on  account  of  mileage 
subject  to  withholding.   (  T.  D.  2090) 

(4)  The  value  of  property  acquired  by  gift,  bequest, 
devise,  or  descent.  (T.  D.  1890;  G.  R.  32)  The  tax  is  im- 
posed only  upon  the  income  from  such  property  and  not 
upon  its  value.     (See  Sec.  4) 

(5)  Interest  upon  the  obligations  of  the  United 
States  or  its  possessions,  or  of  a  State  or  any  political  sub- 
division thereof.  (T.  D.  1890;  G.  R.  32)  Such  interest 
is  exempt  from  the  tax.    (See  Sec.  9) 

(6)  The  compensation  of  the  present  President  of 
the  United  States  for  his  present  term  of  office,  and  of 
Judges  of  the  United  States  courts  in  office  at  the  time  of 
the  passage  of  the  Law;  and  also  the  compensation  of 
officers  or  employees  of  a  State  or  any  political  subdivision 
thereof,  except  when  such  compensation  is  paid  by  the 
United  States  government.  (T.  D.  1890;  G.  R.  32)  These 
items  are  expressly  exempted  from  the  income  tax.  (See 
Sec.  8) 

(7)  Salary  received  by  a  foreign  employee  of  a  do- 
mestic corporation  for  services  rendered  entirely  in  a 
foreign  land.     (T.  D.  2090) 

As  to  income  payable  to  a  fiduciary,  the  tax 
is  not  to  be  withheld  at  the  source  if  the  fiduciary  elects 


NEW  INCOME  TAX  MANUAL.  55 

to  collect  the  entire  amount  and  assume  responsibility 
for  the  tax ;  but  if  the  fiduciary  prefers  to  have  the  tax  de- 
ducted at  the  source,  the  debtor  or  withholding  agent  must 
deduct  it.    This  matter  is  explained  fully  in  Sec.  37. 

§  34.  COLLECTION  OF  TAX  ON  INTEREST 
ON  BONDS,  MORTGAGES,  ETC,  OF 
CORPORATIONS,    ASSOCIATIONS, 

ETC. 

The  normal  tax  of  1%  on  income,  gains,  or  profits, 
accruing  to  a  citizen  of  the  United  States,  whether  resid- 
ing in  the  United  States  or  abroad,  or  to  a  person  resid- 
ing in  the  United  States  although  not  a  citizen  thereof,  de- 
rived from  interest  upon  bonds,  mortgages,  deeds  of  trust,, 
or  other  similar  obligations  (including  equipment  trust 
agreements  and  receivers'  certificates)  of  corporations, 
joint-stock  companies  or  associations,  or  insurance  com- 
panies, whether  payable  annually  or  at  longer  or  shorter 
periods,  must  be  withheld  at  the  source,  although  such 
interest  does  not  amount  to  |3,000  a  year  unless  an  exemp- 
tion is  claimed.    (Par.  E ;  T.  D.  1887;  G.  R.  37;  T.  D.  2090) 

In  this  connection  the  term  "similar  obligations"  of 
corporations  means  those  obligations  which,  although  not 
bonds,  mortgages,  or  deeds  of  trust,  are  similar  in  form,  in 
purpose,  or  in  being  extended  beyond  the  time  of  ordinary 
bankable  commercial  paper;  and  investment  certificates  or 
securities  issued  by  a  corporation  for  a  term  of  years  are 
corporate  obligations  within  the  meaning  of  the  law.  (T. 
D.  2090) 

Interest  payments  on  ordinary  bankable  commercial 
paper  of  corporations  are  not  subject  to  withholding  at 
the  source  unless  the  payments  to  a  single  individual 
within  the  year  exceed  |3,000,  or  unless  the  interest  is  pay- 
able to  a  nonresident  alien,  in  which  case  the  tax  must  be 
withheld  regardless  of  the' amount  of  interest.  (T.  D. 
2090) 

Where  scrip  certificates  are  issued  by  a  corporation  to 
its  stockholders  in  lieu  of  dividends,  and  such  certificates 
bear  interest  payable  semi-annually  and  are  redeemable  at 


56  NEW  INCOME  TAX  MANUAL. 

a  specified  time  not  more  than  one  year  from  the  date  of 
issue,  the  interest  thereon  is  not  subject  to  withholding  un- 
less the  amount  payable  to  an  individual  in  a  calendar  year 
exceeds  $3,000.     (T.  D.  2090) 

No  deduction  is  to  be  made  from  interest  upon  the 
obligations  of  the  United  States  or  its  possessions,  or  of 
a  State  or  any  political  subdivision  thereof.  (T.  D.  1887; 
O.  R.  37) 

Tlie  term  "debtor"  is  used  in  the  regulations  as 
covering  all  corporations,  joint-stock  companies  or  asso- 
ciations, and  insurance  companies  upon  whose  obligations 
interest  is  payable.     (T.  D.  1887;  G.  R.  38) 

Appointment  of  fiscal  agent  by  debtor.— 
The  ^'debtor"  may  appoint  paying  or  fiscal  agents  to  act 
for  it  in  all  matters  pertaining  to  the  collection  of  the 
Income  Tax,  upon  filing  with  the  Collector  of  Internal 
Revenue  for  its  district  a  proper  notice  of  the  appoint- 
ment of  such  agent  or  agents.  (T.  D.  1887;  G.  R.  38) 
Such  withholding  agent  may  file  the  necessary  returns 
when  authorized  by  the  debtor.     (G.  R.  38) 

What  is  tlie  "sonree"  of  income.- For  the  pur- 
pose of  collecting  the  tax  upon  coupons  or  registered  in- 
terest, the  debtor  or  its  paying  or  fiscal  agent  in  the  United 
States  is  regarded  as  the  source  of  income.  (T.  D.  1887; 
O.  R.  39) 

When  tax  to  be  -nritliheld  by  debtor  or  fiscal 
agent.— When  a  coupon  or  order  for  registered  interest 
is  accompanied  by  a  certificate  of  ownership  not  claiming 
exemption  (Form  1000)  signed  by  the  owner  of  the  bond 
on  which  the  interest  is  due,  the  tax  is  to  be  withheld  by 
the  debtor  or  its  fiscal  agent,  and  no  other  bank,  trust 
company,  banking  firm,  or  individual  taking  the  coupon 
or  interest  order  for  collection  or  otherwise  may  withhold 
the  tax  thereon.  To  make  such  course  proper  a  separate 
certificate  must  be  made  out  by  each  owner  of  bonds  for 
the  coupons  or  interest  orders  for  each  separate  issue  of 
bonds  or  obligations  of  each  debtor.  (T.  D.  1887;  G.  R. 
59) 

The  ownership  certificate  need  not  be  signed  with  the 


NEW  INCOME  TAX  MANUAL.  57 

full  Christian  name  of  the  owner,  but  his  ordinary  or 
usual  business  signature  may  be  used,  provided  it  iden- 
tifies him  and  is  accompanied  by  his  complete  address. 
(T.  D.  1920)  Where  no  street  address  is  given  in  a  certifi- 
cate it  will  be  assumed  that  the  same  is  not  necessary  in 
addressing  mail,  and  the  certificate  will  be  accepted.  (Let- 
ter of  April  23,  1914,  to  National  Park  Bank) 

A  corporation,  collecting  agency,  or  person  first  re- 
ceiving from  the  owner  any  interest  coupon  or  order  for 
the  collection  of  registered  interest,  and  to  whom  a  certifi- 
cate of  ownership  is  delivered,  must  require  the  person 
tendering  such  coupon  or  order  satisfactorily  to  establish 
his  identity.    ( T.  D.  1887 ;  G.  R.  52 ) 

Signing  of  cexrtificate  of  ownership  by 
Agent.— The  certificate  of  ownership  may  be  signed  in  the 
name  of  the  owner  of  the  bonds  by  his  duly  authorized 
agent,  in  w^hich  case  the  certificate  must  show  the  full 
name  and  address  of  both  the  owner  and  his  agent.  If  the 
person,  firm,  or  organization  to  whom  or  which  such  cer- 
tificate is  presented  is  satisfied  as  to  the  identity  and  re- 
sponsibility of  the  person  signing,  he  or  it  must  stamp  or 
write  on  the  face  of  the  certificate  the  words :  "Satisfied 
as  to  identity  and  responsibility  of  agent,"  giving  the  name 
and  address  of  the  agent,  and  the  certificate  may  then  be 
accepted  by  persons,  firms,  or  organizations  to  whom  or 
which  it  is  presented  without  requiring  further  evidence 
of  the  authority  of  the  agent.  If  the  person,  firm,  or  or- 
ganization first  receiving  a  certificate  of  ownership  signed 
by  an  agent  be  not  satisfied  or  cannot  satisfy^  himself  or 
Itself  of  the  agent's  authority,  the  agent  must  furnish  evi- 
dence of  his  authority  to  act,  and  the  person,  firm,  or  or- 
ganization shall  then  endorse  on  the  certificate  the  fact 
of  his  or  its  satisfaction  as  to  the  identity  and  responsi- 
bility of  the  agent,  retaining  the  evidence  of  authority  so 
furnished.     (T.  D.  1904 ;  G.  B.  43) 

Forwarding  of  or  snbstitntion  for  certifi- 
cate of  oimersliip  by  collecting  agent.— Respon- 
sible banks,  bankers,  and  collecting  agents  (in  foreign 
countries  as  well  as  in  the  United  States)  receiving  cou- 


58  NEW  INCOME  TAX  MANUAL. 

pons  for  collection  with  certificates  of  ownership  attached 
may  either  present  the  coupons  with  the  attached  certifi- 
cates to  the  debtor  or  withholding  agent  for  collection,  or, 
at  the  option  of  the  collecting  agent,  the  certificates  may 
be  detached  from  such  coupons  and  forwarded  direct  to 
the  Commissioner  of  Internal  Revenue  at  Washington,  D. 

C,  not  later  than  the  20th  of  the  month  following  that  on 
which  the  coupons  were  received  for  collection.  (T.  D. 
1903;  G.  R.  40) 

In  the  latter  case,  the  bank  or  other  collecting  agent 
must  substitute  for  the  owner's  certificate,  and  attach  to 
the  coupons,  in  lieu  thereof,  its  own  certificate  ( Form  1058 
if  exemption  was  claimed  and  Form  1059  if  exemption  was 
not  claimed)  showing  that  the  coupons  were  presented 
with  a  certificate  of  ownership  attached,  and  that  such 
certificate  will  be  forwarded  to  the  Commissioner  of  In- 
ternal Revenue  within  the  time  prescribed.  (T.  D.  1903; 
G.  R.  40)  The  name  of  the  bank  or  collecting  agent  may 
be  printed  or  stamped  on  these  substitute  certificates;  as 
may  also  the  signature  of  the  person  authorized  to  sign 
the  certificate  for  the  bank  or  collecting  agent,  provided 
authorization  for  the  use  of  such  facsimile  signature  is 
first  filed  with  the  Commissioner  of  Internal  Revenue.    ( T. 

D.  1986) 

The  certificate  of  ownership  which  is  thus  detached 
must  be  endorsed,  preferably  with  a  rubber  stamp,  with 
a  statement  showing  that  the  collecting  agent's  certificate 
was  attached  to  the  coui>ons  in  lieu  thereof.     (T.  D.  1903) 

Banks,  bankers,  and  other  collecting  agents  making 
such  substitution  of  certificates  are  required  to  keep  a 
complete  record  of  all  such  transactions  and  substitutions 
(T.  D.  1903;  G.  R.  40),  but  no  license  is  required  to  au- 
thorize them  to  make  such  substitution  of  certificates.  (T. 
D.  1903) 

Where  interest  checks  are  sent  ont  to  the 
registered  owners  of  bonds  registered  both  as  to  principal 
and  interest,  the  debtor  must  withhold  the  normal  tax  of 
1%,  unless  the  registered  owner  has  filed  with  the  debtor, 
at  least  five  days  before  the  date  on  which  the  interest  is 


NEW  INCOME  TAX  MANUAL.  59 

due,  a  certificate  claiming  exemption.  (T.  D.  1887;  G.  R. 
41,  42;  T.  D.  1974)  The  forms  of  certificate  provided  for 
the  use  of  owners  of  coupon  bonds  (Form  lOOOB  for  in- 
dividual owners,  Form  1001  for  firms  or  organizations, 
and  Form  1004  for  nonresident  aliens)  may  be  used  by  the 
owners  of  registered  bonds  for  the  purpose  of  claiming 
exemption.     (T.  D.  1974) 

Interest  orders  or  checks  so  sent  out  must  have 
stamped  or  written  thereon  the  words  "Exemption  claimed 
by  certificate  filed  with  debtor"  or  "Income  tax  withheld 
by  debtor"  as  the  case  may  be,  and  when  they  are  so  en- 
dorsed they  need  not  be  accompanied  by  any  certificate 
of  ownership  when  presented  for  collection.     (T.  D.  1974) 

Where  a  part  of  the  interest  has  been  withheld  for 
payment  of  the  income  tax,  the  debtor  may,  upon  the 
proper  certificate  being  afterwards  filed,  release  and  pay 
to  the  person  entitled  thereto  the  amount  of  income  with- 
held, to  the  extent  of  the  exemption  claimed.  (T.  D. 
1974) 

Interest  checks  sent  out  by  corporations  which  are 
exempt  from  the  operation  of  the  Income  Tax  Law  (See 
Sec.  1)  should  have  stamped  or  written  across  the  face 
thereof  "Corporation  exempt  under  paragraph  G  from 
withholding;"  otherwise  the  first  bank  or  collecting  agent 
should  deduct  and  withhold  the  normal  tax  therefrom. 
(T.  D.  2090) 

When  tax  to  be  Trithheld  by  first  colleet- 
ing  agency.—  When  a  coupon  or  interest  order  is  not 
accompanied  by  a  certificate  of  ownership  (Form  1000  or 
Form  lOOOB ) ,  the  first  bank,  trust  company,  banking  firm 
or  individual,  or  collecting  agency  receiving  such  coupon 
or  interest  order  for  collection  or  otherwise  must  deduct 
and  withhold  the  tax,  and  must  attach  to  the  coupon  or 
interest  order  his  or  its  own  certificate  (Form  1002)  giv- 
ing the  name  and  address  Of  the  owner  of  the  coupon  or 
order,  or  of  the  person  presenting  such  coupon  or  order  if 
the  owner  is  not  known,  describing  the  coupon  or  order, 
and  stating  that  he  or  it  (the  bank  or  other  collecting 
agency)    is  withholding  the  tax  upon  such  coupon  or 


eO  NEW  INCOME  TAX  MANUAL. 

order.  Where  this  is  done,  the  debtor  cannot  again  with- 
hold the  tax  upon  such  coupon  or  order,  but  in  lieu  there- 
of must  deliver  to  the  Government  the  certificate  of  the 
bank  or  other  collecting  agency  which  withheld  the  tax. 
(T.  D.  1887;  G.  R.  52) 

This  does  not  apply  to  coupons  representing  the  in- 
terest on  bonds  or  other  obligations  of  the  United  States 
or  any  of  its  possessions,  or  of  a  State  or  any  political  sub- 
division thereof,  such  as  a  city,  county,  etc.  (T.  D.  1892; 
G.  R.  37) 

Claim  of  fixed  exemption.— A  citizen  or  resi- 
dent of  the  United  States,  who  wishes  to  claim  his  fixed 
exemption  of  |3,000,  or  $4,000  as  the  case  may  be,  with 
respect  to  the  income  accruing  from  interest  on  corporate 
bonds,  mortgages,  etc.,  must  state  this  fact  in  the  certifi- 
cate of  ownership  (Form  lOOOB)  which  accompanies  his 
coupons  when  presented  for  collection.  When  the  interest 
is  registered  this  certificate  must  be  filed  with  the  debtor 
at  least  five  days  before  the  date  when  such  interest  is 
due.    (T.  D.  1887;  G.  R.  44;  T.  D.  1974) 

Such  a  certificate  must  be  signed  by  the  claimant,  and 
must  contain  his  post-office  and  street  address,  and  the 
date  when  signed.  But  a  duly  authorized  agent,  trustee 
acting  in  a  trust  capacity,  etc.,  may  sign  such  a  certificate 
for  the  person  for  whom  he  acts.  (T.  D.  1887)  Such  a 
certificate  need  not  be  signed  with  the  full  name  of  the 
claimant,  but  the  ordinary  or  usual  business  signature  of 
the  claimant  may  be  used,  provided  it  identifies  him  and 
is  accompanied  by  his  complete  address.  (T.  D.  1920) 
Where  no  street  address  is  given  it  will  be  assumed  that 
the  same  is  not  necessary  in  addressing  mail,  and  the  cer- 
tificate will  be  accepted.  (Letter  of  April  23,  1914,  to 
National  Park  Bank) 

Where  securities  are  owned  jointly  by  several  per- 
sons, and  a  certificate  of  ownership  claiming  exemption 
(Form  lOOOB)  is  filed,  the  person  signing  such  certificate 
may  claim  the  exemption  thereon  only  in  his  own  right, 
and  such  other  joint  owners  as  desire  to  claim  exemption 
against  their  pro  rata  share  of  the  income  should  file  with 


NEW  INCOME  TAX  MANUAL.  61 

the  person  who  signs  the  certificate  of  ownership  their  own 
certificates  of  exemption  on  Form  1007,  which  should  be 
attached  to  the  ownership  certificate  when  presented.  (Let- 
ter of  May  14,  1914,  to  Central  Trust  Co.) 

A  claim  for  deductions,  other  than  the  fixed 
exemption,  may  be  made  by  filing  a  statement  of  the  de- 
ductions claimed  (Form  1008)  with  the  debtor  at  least 
thirty  days  before  March  1st,  or  applying  to  the  Collector 
of  Internal  Revenue,  within  the  same  time,  for  such  de- 
ductions.    (Par.  E;  G.  R.  33;  T.  D.  1890) 

Bonds  owned  by  corporations,  etc.— The 
debtor  is  not  required  to  withhold  or  deduct  the  tax  upon 
income  derived  from  interest  upon  bonds  owned  by  cor- 
porations, joint-stock  companies  or  associations,  or  insur- 
ance companies,  or  other  organizations,  associations,  fra- 
ternities, etc.  (Par.  E),  where  the  coupons  or  interest 
orders  are  accompanied  by  a  certificate  of  ownership  ( Form 
1001)  which  certificate  must  be  filed  with  the  debtor  when 
the  coupons  or  interest  orders  are  presented  for  payment. 
(T.  D.  1887;  G.  R.  45)  A  corporation,  association,  etc., 
of  a  foreign  country  should  use  Form  1004  in  making  its 
claim  of  exemption. 

Bond  or  other  obligation  oiimed  by  part- 
nership.—Where  a  coupon  or  interest  order,  presented 
for  payment,  represents  the  interest  on  a  bond  or  similar 
obligation  owned  by  a  partnership,  it  must  be  accom- 
panied by  a  certificate  of  ownership  ( Form  1001 ) ,  evidenc- 
ing the  fact  of  partnership  ownership,  and  when  such  cer- 
tificate is  filed  the  tax  on  such  interest  payment  is  not 
to  be  withheld.     (T.  D.  1957) 

Bonds  oxmed  by  non-resident  foreigners.— 
The  tax  will  not  be  deducted  from  the  interest  on  bonds, 
mortgages,  equipment  trusts,  receivers'  certificates,  or 
other  similar  obligations  the  bona  fide  owners  of  which  are 
non-resident  aliens  where  the  interest  coupons  or,  in  case 
of  wholly  registered  bonds,  the  orders  for  the  payment  of 
such  interest,  are  accompanied  by  a  certificate  showing 
the  foreign  citizenship  and  residence  of  the  owner.  ( T.  D. 
1887;  G.  R.  46;  T.  D'.  2017) 


€2  NEW  INCOME  TAX  MANUAL. 

When  the  certificate  is  made  by  the  owner,  it  should 
be  on  Form  1004,  but  it  is  also  provided  that  responsible 
banks  or  bankers  in  the  United  States  or  in  foreign  coun- 
tries may  execute  a  certificate  (Form  1060)  to  accompany 
coupons  or  orders  for  interest  on  bonds  owned  by  non- 
resident aliens.  This  certificate  does  not  give  the  names 
of  the  owners,  but  is  merely  a  declaration  of  the  bank  or 
banker  of  the  fact  of  foreign  ownership  together  with  his 
or  its  agreement  to  pay  the  tax  upon  presentation  of  proof 
that  the  interest  was  taxable.     (T.  D.  1977;  T.  D.  1988) 

Bonds  of  exempt  coxrp orations,  etc.— When 
coupons  from  bonds  of  corporations,  etc.,  which  are  exempt 
from  the  provisions  of  the  Income  Tax  Law  (See  Sec.  1) 
are  presented  to  a  bank  or  collection  agency  for  collection 
in  the  ordinary  course,  a  certificate  of  ownership  (Form 
1000  or  Form  lOOOB)  should  be  attached  thereto,  and  in 
such  case  no  tax  should  be  deducted  or  withheld.    But  if 
such  coupons  are  presented  without  a  certificate  of  owner- 
ship, the  bank  or  collection  agency  is  required  to  deduct 
the  tax  and  attach  its  own  certificate  (Form  1002)  to  the- 
coupon.     (Letter  of  July  30,  1914,  to  Corporation  Trust 
Co.,  as  subsequently  modified  by  ruling  contained  in  Let- 
ter of  Nov.  18,  1914,  to  Collector  of  Internal  Revenue  at 
St.  Louis,  Mo.    See  also  T.  D.  2090) 

Iiangnage  of  certificates  to  be  used  by  for- 
eigners.—Certificates  of  ownership  which  are  to  be  filed 
by  non-resident  foreigners  and  by  foreign  partnerships  and 
organizations  must  be  printed  in  the  English  language, 
but  the  text  of  the  certificate  may  also  be  printed  in  a  for- 
eign language  underneath  the  lines  of  the  English  text. 
Values  must  be  expressed  in  United  States  dollars  in  fill- 
ing in  the  blanks  provided  for  that  purpose.     (T.  D.  1926) 

Coupons  maturing  at  different  dates.— 
Where  coupons  from  bonds  of  the  same  issue  become  due 
at  different  dates,  a  separate  certificate  of  ownership 
should  be  filed  for  each  maturity  of  coupons.  (Letter  of 
Dec.  7, 1914,  to  Brown  Brothers,  which  changes  the  ruling 
contained  in  letter  of  Nov.  2,  1914,  to  Corporation  Trust 
Company) 


NEW  INCOME  TAX  MANUAL.  63 

Showing  numbers  of  bonds  on  certifi- 
cates.—The  regulation  requiring  the  filling  in  on  cer- 
tificates of  the  numbers  of  bonds  or  other  like  obligations 
of  corporations,  etc.,  from  which  interest  coupons  are  de- 
tached or  upon  which  registered  interest  is  paid,  has  been 
waived  until  further  notice.     (T.  D.  2022) 

Disposition  of  certificates.— The  debtor  or  its 
paying  or  fiscal  agent  must  deliver  all  certificates  received 
by  or  filed  with  it,  together  with  a  list  of  the  names  and 
addresses  of  those  for  whom  the  tax  has  been  withheld, 
showing  amounts,  to  the  Collector  of  Internal  Revenue  of 
its  district  on  or  before  the  20th  day  of  the  month  succeed- 
ing that  in  which  the  certificates  were  received.  (T.  D. 
1887) 

Amount  actually  received  by  oumer  of 
bonds.— It  is  to  be  noted  that  the  provisions  as  to  who 
shall  withhold  the  tax  relate  to  responsibility  to  the  gov- 
ernment, and  do  not  affect  the  amount  which  the  person 
presenting  the  coupons,  etc.,  receives.  That  is  to  say,  even 
though  the  coupons,  etc.,  are  accompanied  by  a  proper  cer 
tificate  of  ownership  (Form  1000)  the  owner  (not  claim 
ing  an  exemption)  must  not  expect  the  bank  or  other  col 
lecting  agency  to  credit  him  with  the  face  value  thereof 
but  he  will  be  credited  only  with  the  amount  actually  col 
lected  thereon,  that  is,  the  face  value  less  the  tax  of  1% 

The  exchange  of  interest  conpons  for 
funding  bonds  is  a  payment  of  interest  on  the  bonds 
and  the  income  tax  should  be  imposed  and  paid  upon  such 
interest  as  income  for  the  year  in  which  it  matures  and 
the  payment  is  made,  and  in  the  absence  of  a  proper  claim 
for  exemption  the  tax  should  be  deducted  and  withheld 
upon  the  amount  represented  by  the  coupons.    (T.  D.  2090) 

Retirement  of  bonds.— Where  bonds,  under  con- 
tract provisions  therein,  are  retired  within  an  interest 
period  and  prior  to  the  expiration  of  the  full  term  of  the 
bonds,  ownership  certificates  are  required  and  should  cover 
that  part  of  the  interest  period  affected  between  the  begin- 
ning of  such  period  and  the  retirement  of  the  bonds.  (T. 
D.  2090) 


64  NEW  INCOME  TAX  MANUAL. 

Securities  guaranteed  free  from  taxa- 
tion.—A  corporation,  company,  or  association  which  has 
issued  bonds  or  other  evidences  of  indebtedness  with  a 
guaranty  that  the  interest  thereon  shall  be  free  from  taxa- 
tion, is  not  entitled  to  make  any  deduction  for  the  pay- 
ment of  the  income  tax.     (Par.  G,  subd.  b) 

A  contract  entered  into  after  the  Income 
Tax  Liaur  took  effect  cannot  have  any  effect  in  re- 
gard to  any  income  tax  imposed  upon  any  person  liable  to 
payment  thereof.  (Par.  E;  G.  R.  27)  This  does  not 
amount  to  a  prohibition  against  the  issuance  of  bonds  con- 
taining a  "tax  free"  or  "no  deduction"  clause  after  the 
Income  Tax  Law  went  into  effect.  But  in  view  of  the  pro- 
visions of  the  law,  such  a  clause  will  not  release  a  taxable 
person  from  liability  for  the  income  tax  with  respect  to 
the  income  received  on  such  bonds;  and  the  debtor  cor- 
poration, or  its  duly  authorized  agent  in  paying  coupons 
from  such  bonds,  will  be  held  responsible  for  the  normal 
tax  due  in  such  cases  when  no  tax  is  withheld  and  no  ex- 
emption claimed.  (Letter  of  Dec.  11,  1914,  to  Collector 
of  Internal  Revenue  at  Boston,  Mass.) 

§35.  COLLECTION  AT  THE  SOURCE  OF 
TAX  ON  INCOME  OTHER  THAN 
INTEREST  ON  BONDS,  MORT' 
GAGES,  ETC,  OF  CORPORATIONS, 
ASSOCIATIONS,  ETC. 

"Debtor"  and  "xrithholding  agent."— A  per- 
son, corporation,  etc.,  occupying  the  position  of  a  source 
of  income  is  referred  to  as  the  "debtor,"  and  the  debtor's 
duly  authorized  agent  to  make  the  deduction  and  pay- 
ment is  referred  to  as  the  "withholding  agent."  (T.  D. 
1890) 

By  Tv-hom  tax  withheld.— The  tax  is  to  be  de- 
ducted and  withheld  at  the  source  of  income,  and  payment 
made  to  the  Collector  of  Internal  Revenue,  by  the  debtor 
or  his,  her,  or  its  duly  appointed  agent  authorized  to  make 
such  deduction  and  payment;  and  no  other  person,  firm, 
or  organization,  in  whatever  capacity  acting,  having  the 


NEW  INCOME  TAX  MANUAL.  65 

receipt,  custody,  or  disposal  of  any  income  is  required 
again  to  deduct  and  withhold  the  tax  thereon.  (T.  D. 
1890;  G.  R.  34)  Any  person,  firm,  or  organization,  other 
than  the  debtor,  who  has  withheld  the  tax  is  required  to 
file  with  the  Collector  of  Internal  Revenue  of  his,  her,  or 
its  district  a  certificate  (Form  1006)  showing  the  receipt, 
source,  and  nature  of  such  income,  the  amount  and  owner- 
ship thereof,  and  the  fact  of  the  deduction  of  the  tax.  (T. 
D.  1890;  G.  R.  34) 

When  and  lioiir  tax  deducted.- When  interest, 
rents,  salaries,  wages  or  other  income  is  paid  monthly  or 
periodically  during  the  year,  nothing  is  to  be  withheld  for 
the  tax  until  the  payments  aggregate  $3,000.  But  as  soon 
as  that  amount  is  reached,  the  tax  is  to  be  withheld  on 
the  whole  amount  (the  |3,000  already  paid  and  the  excess 
over  that  amount)  unless  the  person  entitled  to  receive 
the  money  files  a  notice  of  claim  of  exemption  (Form  1007), 
in  which  case  the  tax  is  to  be  withheld  only  as  to  the  excess 
over  13,000  or  |4,000  as  the  case  may  be.  (T.  D.  1890; 
G.  R.  64,  65;  T.  D.  2090) 

Rent.— Where  rent  in  excess  of  $3,000  in  a  year  be- 
comes due  to  an  individual,  it  is  the  duty  of  the  tenant 
or  lessee  to  withhold  the  tax,  and  he  cannot  transfer  his 
duty  in  this  respect  to  a  real  estate  agent  who  collects  the 
rent.  Nor  is  such  agent  authorized  to  withhold  from  the 
owner,  on  account  of  the  income  tax,  any  part  of  the 
amount  which  he  receives  as  rent.     ( T.  D.  2090 ) 

Where  a  tenant  rents  two  pieces  of  property  from 
the  same  owner,  the  tenant  should  combine  the  payments, 
and  when  such  payments  so  combined  aggregate  in  excess 
of  |3,000  the  normal  tax  should  be  deducted  and  withheld, 
subject  to  authorized  exemptions  claimed.     (T.  D.  2090) 

A  lessee  paying  rent  in  excess  of  |3,000  a  year  under 
a  lease  from  two  or  more  individuals  must  make  deduction 
from  all  payments  to  individuals  in  excess  of  |3,000  un- 
less certificates  of  exemption  are  filed.  He  should  ascer- 
tain in  what  proportion  the  rent  is  divided  by  the  use  of 
office  Form  lOOOB,  which  may  be  adapted  and  executed 
by  one  of  the  parties  in  interest,  the  others  executing  Form 
1007.    The  withholding  should  be  made  from  the  incoane 


66  NEW  INCOME  TAX  MANUAL. 

of  individuals  and  not  from  the  aggregate  amount  paid. 
This  situation  is  not  different  because  the  lessors  are  hus- 
band and  wife  if  their  individual  interests  are  separate, 
nor  is  it  changed  because,  by  instruction,  the  actual  pay- 
ments of  rent  are  made  to  one  lessor,  to  be  distributed 
by  him.     (T.  D.  2090) 

Where  notes  are  given  in  payment  of  rent,  the  lessee's 
obligation  to  withhold  is  not  altered,  and  the  withholding 
should  be  at  the  time  the  notes  are  given,  and  not  at  ma- 
turity.    (T.  D.  2090) 

When  rental  payments  in  excess  of  |3,000  a  year  are 
payable  to  a  fiduciary,  who  fails  or  refuses  to  file  Form 
1063,  agreeing  to  act  as  the  source,  the  beneficiaries  are 
not  entitled  to  file  exemption  certificates  directly,  the  lease 
having  been  taken  from  the  fiduciary.  If  the  fiduciary's 
certificate  is  not  filed,  the  lessee  should  withhold  1  per 
cent  on  the  entire  amount.  The  lessee  is  not  presumed  to 
have  knowledge  of  the  beneficiaries  unless  they  are  parties 
to  the  lease.     (T.  D.  2090) 

Where  a  board  of  education  for  a  school  district  rents 
property  at  an  annual  rental  exceeding  |3,000,  such  board 
of  education  is  regarded  as  a  tenant  and  should  with- 
hold the  normal  tax,  subject  to  the  exemption  claimed. 
(T.  D.  2090) 

Salaries  are  subject  to  withholding  on  the  basis  of 
the  calendar  year  only,  even  though  the  corporation  by 
which  they  are  paid  has  a  fiscal  year  different  from  the 
calendar  year.     (T.  D.  2090) 

Status  of  individual  mortgage  assumed 
by  corporation.— Where  an  individual  issues  coupon 
bonds  secured  by  a  mortgage  upon  real  estate,  and  subse- 
quently a  corporation  purchases  the  real  estate  and  as- 
sumes (as  between  the  mortgagor  and  itself)  the  pay- 
ment of  bonds  and  coupons,  the  character  of  the  bond 
obligation  remains  unchanged  and  as  created,  even  though 
the  corporation  is  to  pay  all  interest  and  will  ultimately 
pay  off  the  mortgage,  and  there  will  be  no  withlmlding 
by  the  corporation  (it  being  placed  in  the  stead  of  the 
mortgagor)  until  the  interest  payment  to  any  one  person 
in  any  year  exceeds  $3,000.     (T.  D.  2090) 


NEW  INCOME  TAX.  MANUAL.  67 

ClaiiUL  of  exemption.— Where  a  person  entitled 
to  receive  income,  the  tax  upon  which  is  subject  to  be  with- 
held at  the  source,  wishes  to  claim  his  fixed  exemption  of 
|3,000  or  |4,000  as  the  case  may  be,  with  respect  to  such 
income,  he  must  file  with  the  debtor  or  withholding  agent, 
not  less  than  thirty  days  before  March  1st,  a  notice  ( Form 
1007)  claiming  such  exemption.     (T.  D.  1890;  G.  R.  33) 

A  landlord  may  file  such  a  claim  with  his  tenant. 
(T.  D.  2090) 

Firms,  organizations,  or  fiduciaries  desiring  to  estab- 
lish their  identity  and  non-liability  to  having  the  tax  with- 
held as  to  them  must  use  Form  1063  for  this  purpose.  (T. 
D.  1998) 

Claim,  of  deductions.— Where  a  person,  upon  a 
part  of  whose  income  the  tax  is  to  be  withheld  at  the  source, 
wishes  to  avail  himself  of  the  deductions  (as  distinguished 
from  the  fixed  exemption)  which  the  law  allows  (see  Sec. 
4),  he  must  file,  not  later  than  30  days  piior  to  March  1st, 
either  with  the  Collector  of  Internal  Revenue  for  the  dis- 
trict in  which  a  return  is  to  be  made  for  him  or  vrith  the 
debtor  or  withholding  agent  a  statement  (Form  1008) 
showing  his  total  income  and  the  deductions  to  which  he  is 
entitled.    (T.  D.  1890;  G.  R.  33,  66) 

A  landlord  may  file  such  a  claim  with  his  tenant  or 
with  the  Collector  of  Internal  Revenue.     (T.  D.  2090) 

Statement  for  exemption  or  deductions  by 
ivithliolding;  agent.— Where  the  one  for  whom  the  tax 
is  to  be  withheld  and  paid  is  a  minor,  or  insane,  or  is  ab- 
sent from  the  United  States,  or  is  prevented  by  illness  from 
making  the  statement  or  application,  the  statement  for  ex- 
emptions or  deductions  or  the  application  for  deductions 
may  be  made  by  the  one  required  to  withhold  and  pay  the 
tax,  if  he  has  sufficient  knowledge  of  the  facts,  which  must 
be  made  to  appear  by  his  sworn  statement.  (Par.  E ;  T.  D. 
1890;  G.  R.  33;  Form  1009) 

Coupons  from  bonds  of  United  States, 
States,  Municipalities,  etc.—  Coupons  representing 
interest  on  bonds  or  other  obligations  of  the  United  States 
or  any  of  its  possessions,  or  of  a  State  or  any  political  sub- 
division thereof,  such  as  a  city,  county,  etc.,  need  not  be 


68  NEW  INCOME  TAX  MANUAL. 

accompanied  by  any  certificate  of  ownership,  as  the  in- 
terest upon  such  obligations  is  not  subject  to  the  income 
tax.     (T.  D.  1892  ;G.  R.  37) 

§36.  COLLECTION  OF  TAX  ON  INCOME 
ARISING  IN  FOREIGN  COUN^ 
TRIES. 

The  normal  tax  of  1%  must  be  deducted  by  those  who- 
collect  the  proceeds  of  coupons,  checks,  or  bills  of  exchange 
given  in  payment  of  interest  upon  bonds  of  foreign  coun- 
tries, or  foreign  mortgages  or  other  similar  obligations,  or 
dividends  upon  the  stock  or  interest  upon  the  obligations 
of  foreign  corporations,  associations,  or  insurance  com- 
panies engaged  in  business  in  foreign  countries,  although 
the  interest  or  other  income  does  not  exceed  |3,000  a  year. 
(Par.  E) 

liicense  for  collection  from  foreign  conn- 
tries.— Any  person,  firm,  or  corporation  undertaking  as 
a  business,  for  accommodation,  or  for  profit  (which  in- 
cludes handling  either  by  way  of  purchase  or  collections,, 
the  collection  of  interest,  dividends,  or  income,  from  for- 
eign countries,  by  means  of  coupons,  checks,  or  bills  of 
exchange,  etc.),  is  required  to  obtain  a  license  from  the 
Commissioner  of  Internal  Revenue,  and  is  subject  to  such 
regulations  as  shall  be  prescribed  by  that  officer,  with  the 
approval  of  the  Secretary  of  the  Treasury,  enabling  the 
Government  to  ascertain  and  verify  the  withholding  and 
payment  of  the  tax.     (Par.  E;  T.  D.  1887;  G.  R.  54) 

An  application  for  a  license  (Form  1017) 
should  be  made  to  the  Collector  of  Internal  Revenue  for 
the  district  in  which  the  collecting  agent  is  engaged  in 
business.  (T.  D.  1887,  1909;  G.  R.  54)  Such  an  appUca- 
tion,  accompanied  by  a  proper  surety  bond,  when  both  had 
been  approved  by  the  Collector,  was  a  sufficient  compliance 
with  the  law  to  enable  the  person  making  the  application 
to  do  business  until  Feb.  1st,  1914.  (T.  D.  1887)  All  per- 
sons applying  for  licenses  must  register  their  names  and 
addresses  with  the  Collector  of  Internal  Revenue  and  state 


NEW  INCOME  TAX  MANUAL.  » 

the  nature  of  the  business  in  which  they  are  engaged. 
(T.  D.  1887) 

Tlie  license  (Form  1010)  may  be  issued  without 
cost  to  such  persons  as  the  Commissioner  or  Collector  of 
Internal  Revenue  shall  approve  (T.  D.  1887,  1909;  G.  R. 
55),  and  continues  in  force  until  revoked.  (T.  D.  1909  i 
G.  R.  55) 

Bond  of  licensee.— The  Collector  of  Internal 
Revenue  may  require  an  applicant  for  a  license  to  give 
a  bond  satisfactory  to  him,  or  may  issue  the  license  with- 
out a  bond  if  satisfied  of  the  applicant's  business  and  finan- 
cial responsibiUty.  (T.  D'.  1887,  1909;  G.  R.  56)  If  a 
bond  is  required,  it  must  be  filed  for  each  calendar  year; 
and  failure  to  give  or  renew  the  bond  in  cases  where  a  bond 
is  required  will  automatically  revoke  the  license.  (T.  D. 
1909) 

By  ivlioni  tax  Trithlield.—  The  licensed  person, 
firm,  or  corporation  first  receiving  any  such  foreign  items, 
for  collection,  or  otherwise,  must  withhold  therefrom  the 
normal  tax  of  1%,  and  will  be  held  responsible  therefor. 
If  the  foreign  item  is  in  the  form  of  a  check  or  bill  of  ex- 
change, the  words  "Income  tax  withheld  by "  (giving 

name,  address,  and  date)  must  be  endorsed  or  stamped 
thereon  by  the  licensee;  but  if  the  item  is  represented  by 
a  coupon  or  coupons  from  bonds,  the  licensee  must  attach 
thereto  a  statement  identifying  the  same,  and  the  endorse- 
ment showing  that  the  tax  was  withheld  must  be  placed 
on  such  statement  instead  of  the  coupon  or  coupons.  Such 
endorsement  or  stamp  is  sufficient  evidence  of  the  with- 
holding of  the  tax  to  relieve  subsequent  holders  or  pur- 
chasers from  the  obligation  of  withholding.  (T.  D.  2023; 
T.  D.  2090) 

Claim  of  exemption.- Where  an  individual  pre- 
senting foreign  items  for  collection  claims  his  fixed  exemp- 
tion with  respect  thereto  (using  Form  lOOOB  for  this  pur- 
pose) no  tax  is  to  be  deducted  for  the  amount  of  the  ex- 
emption claimed.  (T.  D.  1887;  G.  R.  60)  Where  a  cor- 
poration, joint-stock  company  or  association,  or  insurance 


70  NEW  INCOME  TAX  MANUAL. 

company  presenting  foreign  items  for  collection  claims  its 
exemption  from  deduction  at  the  source  with  respect  to 
such  items  (using  Form  1001  for  this  purpose)  no  tax  is  to 
be  deducted.  (T.  D.  1887;  G.  E.  60)  In  such  cases  the 
licensee  first  receiving  such  items  must  retain  the  certifi- 
cate for  delivery  with  his  list  of  tax  collections  to  the  Col- 
lector of  Internal  Kevenue  for  his  district,  not  later  than 
the  20th  of  the  month  next  succeeding  that  in  which  such 
items  were  received.  With  respect  to  the  coupons,  checks, 
or  bills  of  exchange,  the  licensee  must  attach  thereto 
(identifying  the  items)  or  endorse  or  stamp  thereon  the 
words  "Income  tax  exemption  claimed  through"  (giving 
name  and  address  of  licensee)  which  is  sufficient  evidence 
to  relieve  subsequent  holders  or  purchasers  from  the  duty 
of  withholding  the  tax  thereon.  (T.  D.  1887;  G.  R.  61; 
T.  D.  2090) 

Responsible  banks  and  bankers,  either  domestic  or 
foreign,  may  execute,  for  and  on  behalf  of  non-resident 
owners  of  stock  of  corporations  of  foreign  countries,  a  cer- 
tificate (Form  1071)  claiming  exemption  from  the  income 
tax  on  dividends  on  such  stock.     (T.  D.  2030) 

Fiduciaries  use  Form  1015  in  claiming  exemption  from 
withholding  with  respect  to  interest  on  bonds  of  foreign 
corporations.     (T.  D.  2090) 

Claims  for  exemption  from  withholding  on  income 
other  than  from  interest  on  bonds  may  be  made  by  in- 
dividuals on  Form  1007,  and  by  firms,  organizations,  or 
fiduciaries  on  Form  1063.     (T.  D.  2090) 

Claim  of  deductions.-  If  the  person  for  whom 
interest  or  income  arising  in  foreign  countries  is  collected 
or  to  whom  it  is  payable  wishes  to  claim  the  deductions 
allowed  by  the  Law  (see  Sec.  4),  he  must,  at  least  thirty 
days  before  March  1st,  of  each  year,  file  a  statement  there- 
of (Form  1008)  with  the  one  who  collects  the  amounts, 
or  apply  to  the  Collector  of  Internal  Revenue.     (Par.  E) 

Interest  payable  in  the  United  States.— 
Where  foreign  corporations,  either  municipal  or  private, 
having  fiscal  or  financial  agents  within  the  United  States, 
have  bond  issues  the  interest  on  which  is  payable  wholly 


NEW  INCOME  TAX  MANUAL.  71 

within  the  United  States,  or  within  or  without  the  United 
States  at  the  option  of  the  holder,  and  such  bonds  are 
owned  by  citizens  of  the  United  States  or  aliens  residing 
in  the  United  States,  the  collection  of  interest  oa  such 
bonds  is  to  be  treated  as  a  domestic  transaction  when  cer- 
tificates of  ownership  are  filed  with  the  coupons,  and  the 
fiscal  agents  are  charged  with  the  duty  of  withholding 
and  paying  the  tax.  But  coupons  not  accompanied  by 
such  certificates  are  to  be  treated  as  foreign  items.  (T.  D. 
1992 ;  T.  D.  2006)  Non-resident  aliens  may  use  Form  1063 
in  claiming  exemption  from  the  income  tax  with  respect 
to  dividends  payable  in  the  United  States  from  stock  of 
foreign  corporations.     (T.  D.  2012) 

Dividends  from  foreign  corporation  xrholly 
engaged  in  business  in  the  United  States.— 
Dividends  declared  and  paid  by  a  foreign  corporation 
which  derives  its  entire  net  income  from  business  done 
wholly  within  the  United  States,  and  which  pays  a  tax 
upon  its  net  income  under  the  Income  Tax  Law,  should 
be  treated  in  the  same  manner  as  dividends  from  domestic 
corporations.     (T.  D.  2090) 

Records  to  be  kept  by  licensees.— Persons 
licensed  to  collect  foreign  items  must  keep  their  records  in 
such  manner  as  to  show  from  whom  each  item  has  been  re- 
ceived, and  such  records  are  open  at  all  times  to  the  inspec- 
tion of  internal  revenue  officers.     (T.  D.  1887;  G.  R.  62) 

§37.      COLLECTION   OF   TAX   ON  INCOME 
OF  ESTATES  HELD  IN  TRUST. 

A  fiduciary  must  withhold  the  tax  on  the  income  of 
any  beneficiary  whose  income  from  the  estate  held  in  trust 
exceeds  $3,000,  and  is  personally  liable  for  such  tax.  (Par. 
E;  T.  D.  2090) 

The  term  "fiduciary"  is  used  in  the  regulations 
to  designate  a  guardian,  trustee,  executor,  administrator, 
agent,  receiver,  conservator,  or  any  person,  corporation, 
or  association  acting  in  any  fiduciary  (or  trust)  capacity, 
and  holding  in  trust  an  estate  of  another  person  or  per- 
ions.     (T.  D.  1906;  T.  D.  2090) 


72  NEW  INCOME  TAX  MANUAL. 

While  there  may  be  a  fiduciary  relation  between  prin- 
cipal and  agent,  the  word  "agent"  does  not,  of  itself,  de- 
note a  fiduciary  within  the  meaning  of  the  Income  Tax 
Law.     (T.  D.  2090) 

Where  the  annual  inconLe  is  not  distrib- 
uted or  paid  to  the  beneficiaries  of  the  trust,  the  fiduci- 
ary must  nevertheless  withhold  the  normal  tax  of  1%  on 
the  distributive  interest  of  each  beneficiary  whose  interest 
exceeds  $3,000,  and  pay  the  tax  over  to  the  Collector  of 
Internal  Revenue  the  same  as  though  such  income  had 
been  distributed  to  the  beneficiaries.  Such  payment,  how- 
ever, finally  settles  the  normal  tax  on  such  income  for  all 
time,  and  neither  the  fiduciary  nor  the  beneficiary  can  be 
required  again  to  pay  the  tax  on  such  income  when  it  is 
distributed.     (T.  D.  1906;  G.  R.  75) 

Income  taxable  at  sonrce.— Where  a  fiduciary 
receives,  as  such,  income  of  such  character  that  the  tax 
thereon  would  ordinarily  be  withheld  by  the  person  or  cor- 
poration paying  over  such  income  (as  in  the  case  of  in- 
terest on  corporate  bonds  or  mortgages,  income  from  for- 
eign countries,  interest  on  real  estate  or  chattel  mortgages, 
rents,  etc.),  he  may  either  permit  the  tax  thereon  to  be 
deducted  at  the  source  as  in  ordinary  cases  (T.  D.  1911; 
G.  R.  70),  or  collect  the  entire  income  intact,  without  any 
deduction  for  the  tax,  in  which  latter  case  he  is  regarded 
as  the  source  of  income,  and  must  withhold  the  tax  from 
the  amount  so  collected  by  him.     (T.  D.  1906;  G.  R.  70) 

Notice  authorizing  debtor  or  xrithholding 
agent  to  withhold  tax.-  Where  the  fiduciary  prefers 
to  allow  the  debtor  or  withholding  agent  to  withhold  the 
tax  on  income  due  him  in  his  fiduciary  capacity,  he  must 
file  a  notice  stating  that  he  does  not  claim  the  exemption 
from  having  the  tax  so  withheld  ( Form  1019 ) ,  and  in  such 
case  the  tax  is  to  be  withheld  by  the  debtor  or  withholding 
agent  as  in  any  other  case,  and  the  fiduciary  is  not  required 
to  make  any  deduction  from  the  income  which  he  receives. 
(T.  D.  1911  ;G.  R.  70) 

Notice  to  prevent  irithholding  of  tax  on  in- 
come due  fiduciary  as  snch.— Where   the   fiduciary 


NEW  INCOME  TAX  MANUAL.  73 

does  not  wish  to  have  the  tax  withheld  on  income  arising 
from  interest  on  corporate  bonds,  due  him  as  such,  he  must 
file  with  the  debtor  or  withholding  agent  a  certificate 
(Form  1015)  showing  that  the  income  accrues  on  a  trust 
estate  and  that  he  (the  fiduciary)  assumes  the  duty  of 
withholding  the  tax  thereon,  and  on  receipt  of  such  cer- 
tificate the  debtor  or  withholding  agent  must  pay  over  the 
entire  interest  or  income  to  the  fiduciary  without  any  de- 
duction for  the  tax,  and  is  relieved  from  any  liability  for 
the  tax  thereon.  (T.  D.  1906;  G.  K.  70)  Where  the  income 
arises  from  a  source  other  than  interest  on  corporate  bonds, 
the  fiduciary  must  use  Form  1063  in  claiming  his  exemp- 
tion from  deduction  of  the  tax.    (T.  D.  1998) 

A  person  holding  a  power  of  attorney  from  another 
has  no  authority  to  file  the  certificate  (Form  1015)  to 
prevent  the  withholding  of  the  tax  on  income  due  to  such 
other.     (T.  D.  2090) 

Bonds  of  same  corporation,  etc.,  belonging 
to  different  estates.— Where  a  fiduciary  has  the  cus- 
tody of  more  than  one  estate  or  trust,  and  such  estates  or 
trusts  have  as  assets  bonds  of  corporations,  etc.,  of  the  same 
issue,  the  fiduciary  may  adapt  his  certificate  (Form  1015 
or  Form  1019)  to  show  that  it  applies  to  more  than  one 
estate  or  trust.  In  such  case  the  description  of  the  estates 
or  trusts  and  the  interest  of  each  must  be  shown  on  the 
back  of  the  certificate,  and  reference  thereto  made  in  the 
space  provided  in  the  form  itself  for  the  description  of 
the  estate  or  trust.    (T.  D.  1961;  T.  D.  1987) 

Corporate  dividends  in  the  hands  of  a  fiduciary 
and  belonging  to  a  beneficiary  are  not  subject  to  the  normal 
tax,  but  are  subject  to  the  additional  tax,  to  be  paid  by 
the  beneficiary,  whenever  his  income  from  all  sources  ex- 
ceeds 120,000.     (T.  D.  2090) 

The  fixed  exemption  may  be  claimed  by  the 
beneficiary  or  his  legal  representative  by  filing  with  the 
fiduciary  notice  of  such  claim  (Form  1007)  whether  or  not 
the  income  is  paid  over  or  distributed  by  the  fiduciary. 
(T.  D.  1906;  G.  R.  74) 

Where  exemption  is  claimed,  the  fiduciary  withholds 


74  NEW  INCOME  TAX  MANUAL. 

the  tax  only  on  the  amount  of  income,  if  any,  in  excess  of 
the  exemption.     (T.  D.  2090) 

§  38.     PROVISIONS  AS  TO  PARTNEUSHIPS. 

A  partnership,  as  such,  is  not  required  to  pay  an 
income  tax  or  to  make  any  return,  but  members  of  the 
firm  are  liable  for  such  tax  only  in  their  individual  capac- 
ity. Each  individual  partner  is  required  to  include  in  his 
return  the  share  of  the  gains,  income,  or  profits  of  the 
firm  to  which  he  would  be  entitled  upon  a  division,  whether 
or  not  a  division  has  been  actually  made,  and  such  share 
is  included  in  the  income  upon  which  he  is  required  ta 
pay  a  tax.  It  is  made  the  duty  of  the  firm,  upon  the 
request  of  the  Commissioner  of  Internal  Revenue,  or  of 
any  District  Collector  of  Internal  Revenue,  to  forward  to 
him  a  correct  statement  of  the  gains,  profits,  and  income 
of  the  firm,  and  the  names  of  the  persons  who  would  be 
entitled  thereto  upon  a  distribution.  (Par.  D;  G.  R.  12, 
13,  94;  T.  D.  1957) 

The  statement  so  furnished  (Form  1065)  must  consist 
of  a  complete  and  correct  report  of  the  gross  income  of 
the  partnership  and  a  complete  account  of  the  actual  legiti- 
mate annual  expenses  of  conducting  the  business  of  the 
partnership  (not  including  the  living  and  personal  ex- 
penses of  the  partners),  and  the  net  profits  of  the  partner- 
ship; and  must  also  give  the  name  and  address  of  each 
member  of  the  partnership  and  show  his  interest  in  the 
net  profits  reported.     (T.  D.  1905;  G.  R.  12) 

Where  undivided  profits  returned.— When 
the  undivided  profits  of  the  partnership  for  a  particular 
year  are  returned  by  the  partners  as  part  of  their  income 
and  the  tax  paid  thereon,  and  such  profits  are  distributed 
in  a  subsequent  year,  the  partners  are  not  required  to 
include  such  profits  in  their  return  of  income  for  the  year 
in  which  the  distribution  is  made.  (T.  D.  1905;  G.  R.  14) 
That  is  to  say,  if  Jones  and  Smith  make  a  profit  of  $10,000 
in  the  year  1914,  but  do  not  divide  it,  and  each  partner 
returns  for  the  year  1914  |5,000  of  income,  consisting  of 
his  share  in  such  profit;  and  in  the  year  1915  the  amount 


NEW  INCOME  TAX  MANUAL.  75 

is  actually  divided  and  paid  over  to  the  partners,  they 
are  not  required  to  include  the  amounts  thus  received  in 
their  returns  for  1915,  although  they  would,  of  course, 
return  as  income  for  that  year  their  share  of  the  profits 
earned  by  the  partnership  during  the  latter  year. 

Premi-aius  on  life  insurance  taken  out  by  a 
partnership  upon  the  lives  of  individual  partners  con- 
stitute allowable  deductions  in  ascertaining  the  net  in- 
come of  the  partnership.  But  when  such  policies  mature, 
or  upon  the  death  of  the  insured  partner,  the  amount  re- 
ceived on  such  policies  must  be  included  in  the  gross  in- 
come of  the  partnership.     (T.  D.  2090) 

Tlie  provisions  for  collecting  the  tax  at 
the  source  of  income  do  not  apply  to  the  income  of 
partnerships  as  such.     (T.  D.  1957) 

Tracing  partnership  income  to  source  for 
purpose  of  claiming  individual  exemption.— 
The  Treasury  Department  holds  that  "income  received 
from  a  partnership  cannot  be  traced  to  its  source  behind 
the  partnership  for  the  purpose  of  claiming  individual 
exemption."  (T.  D.  2090) 

liiuiited  partnerships  are  considered  as  cor- 
porations, and  are  subject  to  the  income  tax  as  such. 
(G.  R.  86) 

§  39.      PENALTIES. 

The  Income  Tax  Law  imposes  the  following  penalties : 

For  failure  of  an  individual  to  make  a  return  or  pay 
the  tax  required  by  law,  a  fine  of  not  less  than  $20  nor 
more  than  |1,000.     (Par.  F;  G.  R.  26;  T.  D.  1950) 

For  making  a  false  or  fraudulent  return  or  statement 
with  intent  to  defeat  or  evade  the  assessment  of  an  income 
tax,  a  fine  not  exceeding  |2,000,  or  imprisonment  for  not 
more  than  one  year,  or  both,  together  with  the  costs  of 
prosecution.     (Par.  F;  G.  R.  26,  164;  T.  D.  1950) 

For  knowingly  making /a  false  statement  or  false  or 
fraudulent  representation  for  the  purpose  of  obtaining  an 
exemption  or  deduction,  either  for  oneself  or  for  another 
person,  a  penalty  of  $300.     (Par.  E;  G.  R.  33) 

For  failure  or  refusal  of  a  corporation,  joint-stock 


n  NEW  INCOME  TAX  MANUAL. 

company  or  association,  or  insurance  company  to  make  a 
return  at  the  proper  time,  or  for  making  a  false  or  frau- 
dulent return,  a  fine  not  exceeding  $10,000.  (Par.  G,  subd. 
d;  G.  R.  164;  T.  D.  1950) 

For  engaging  in  the  business  of  collecting  interest, 
dividends,  or  income  from  foreign  countries  by  means  of 
coupons,  checks,  or  bills  of  exchange,  without  a  license  or 
without  complying  with  the  regulations  prescribed,  a  fine 
not  exceeding  $5,000,  or  imprisonment  for  a  term  not  ex- 
ceeding one  year,  or  both.     (Par.  E;  G.  R.  55) 

For  disclosing  any  information  required  to  be  set 
forth  in  a  return  under  the  Income  Tax  Law,  or  for  print- 
ing or  publishing  any  such  information  in  any  manner  not 
provided  by  law,  a  fine  not  exceeding  |1,000,  or  imprison- 
ment not  exceeding  one  year,  or  both,  in  addition  to  which 
the  offender,  if  an  officer  or  employee  of  the  United  States, 
is  to  be  dismissed  from  office  and  disqualified  to  hold  office 
in  the  future.     (Par.  I;  G.  R.  164,  181) 

Increasing  amount  of  tax.— In  case  of  an  un- 
excused  failure  to  make  a  return  at  the  proper  time  or  the 
making  of  a  false  or  fraudulent  return,  a  further  penalty 
is  imposed  by  increasing  the  amount  of  the  tax.  ( Par.  I ; 
G.  R.  21,  164;  T.  D.  1950) 

§40.      TimiE   TABLE. 

The  times  for  the  various  acts  required  by  the  Income 
Tax  Law  are  as  follows: 

Income  to  be  computed  to  Dec.  31st. 

Return  to  be  made  on  or  before  March  1st 

Notice  of  assessment  to  be  sent  on  or  before  June  1st. 

Tax  to  be  paid  on  or  before  June  30th. 

This  time  table  does  not  apply  to  corporations  or 
associations  which  have  designated  dates  other  than  Dec. 
31st  as  the  closing  of  their  fiscal  years.  In  such  cases  the 
date  so  designated  fixes  the  period  on  which  the  tax  is  to 
be  computed,  and  the  time  for  doing  the  other  acts  enu- 
merated above  is  substantially  the  same  period  after  the 
closing  of  the  fiscal  year  as  the  particular  date  given  above 
for  any  particular  act  is  after  Dec.  31st.  The  method  of 
designating  a  fiscal  year  is  explained  in  Sec.  2&. 


NEW  INCOME  TAX  MANUAL.  77 

§41.      PRACTICAL   WORKING   OF  LATV — 
PREPARATION  OF  RETURN. 

To  illustrate  the  practical  working  of  the  law,  it  will 
be  useful  to  consider  the  suppositious  case  of  John  Brown, 
a  married  man  residing  with  his  wife  ( who  has  no  separate 
income)  in  the  22d  Ward  of  New  York  City,  and  having 
his  office  in  the  downtown  financial  district.  He  is  en- 
gaged in  business  as  an  insurance  broker,  and  also  as  a 
dealer  in  real  estate,  besides  which  he  has  other  business 
interests.  He  is  also  given  to  taking  an  occasional  "flyer" 
in  the  stock  market.  His  receipts  for  the  year  ending  Dec. 
31st,  1914,  were  as  follows: 

(1)  Commissions  from  various  insurance  com- 

-  panics,   $50,000.00 

(2)  Profit  on  various  pieces  of  real  estate 

purchased  and  sold  during  the  year, . .     75,000.00 

(3)  Profits  on  corporate  stock  purchased  and 

sold  during  the  year, 5,000.00 

(4)  Share  of  profits  of  Jones  &  Co.,  a  partner- 

ship,   7,000.00 

(5)  Salary  as  president  of  a  bank, 5,000.00 

(6)  Salary  as  secretary  of  a  lumber  company,  2,500.00 

(7)  Dividends  on  stock  of  various  domestic 

corporations,   10,000.00 

(8)  Dividends  on  stock  of  English  corpora- 

tion,           1,000.00 

(9)  Interest  on   bonds  of  various  domestic 

corporations,  15,000.00 

(10)  Interest  on  United  States  bonds, 2,000.00 

(11)  Interest  on  City  of  New  York  bonds,. . .  1,000.00 

(12)  Interest  on  mortgage  on  office  building,.  5,000.00 

(13)  Interest  on  mortgage  on  farm, 1,500.00 

(14)  Rent  of  store  building, 6,000.00 

(15)  Rents  from  apartment  building  occupied 

by  ten  families  pacing  $900  per  year 

each,   9,000.00 

(16)  Legacy  received  during  the  year, 10,000.00 

Total  receipts $205,000.00 


78  NEW  INCOME  TAX  MANUAL. 

His  expenses  and  losses  for  the  same  period  were  as 
follows : 

(a)  Expenses  of  maintaining  office  (rent,  clerk 

hire,  etc.), $40,000.0a 

(b)  Interest  on  mortgage  on  apartment  build- 

ing,          4,000.00 

(c)  Taxes    paid    (including   income    tax    for 

1913) , 4,000.00 

(d)  Loss  on  stocks  purchased  and  sold  during 

the  year,   20,000.00 

(e)  Loss  on  piece  of  real  estate  purchased  and 

sold  during  the  year, 30,000.00 

(f)  Loss  on  house  destroyed  by  fire    (value 

15,000,  insurance  |3,000), 2,000.00 

(g)  Debt  charged  off  because  of  bankruptcy  of 

debtor,    1,000.00 

(h)   Depreciation  of   office    furniture   and  fit- 
tings,   1,000.00 

(i)    Assessment  for  street  improvement, 2,000.00 

(j)    Cost  of  building  addition  to  residence,. . .  15,000.00 

(k)  Personal,  living,  and  family  expenses,...  40,000.00 

(1)    Donation  to  orphan  asylum, 5,000.00 


Total  expenses  and  losses, |164,000.00 

In  determining  his  taxable  income,  and  the  amount 
of  his  tax.  Brown  will  find  it  most  convenient  to  make  his 
entries  directly  on  his  return.  He  will  accordingly  pro- 
cure, from  the  Collector  of  Internal  Revenue  of  his  dis- 
trict, one  or  more  copies  of  Form  1040,  and  proceed  as  fol- 
lows :  ,  ^^ 
Turning  first  to  page  2  of  the  return,  he  will  find  a 
form  for  a  tabulated  statement  of  his  income,  with  sepa- 
rate columns,  column  A  for  items  on  which  the  tax  has 
been  paid  or  is  to  be  paid  at  the  source  and  column  B  items 
on  which  the  tax  has  not  been  or  is  not  to  be  so  paid.  On 
this  page  he  will  enter  his  income  as  follows : 

Item  (1)  will  be  entered  on  line  13,  in  column  B.  No 
matter  how  great  an  amount  of  commissions  he  may  re- 
ceive during  the  year  from  any  one  insurance  company^ 


NEW  INCOME  TAX  MANUAL.  79 

there  can  be  no  withholding  of  the  tax  thereon,  for  the 
reason  that  the  amounts  are  not  fixed  or  certain. 

The  sum  of  items  (2)  and  (3)  will  be  entered  on  line 
14,  in  column  B. 

Item  (4)  will  be  entered  on  line  19,  in  column  B. 

Item  (5)  will  be  entered  on  line  12,  and  placed  in 
column  A,  because  the  bank  will  have  withheld  the  normal 
tax  on  this  amount. 

Item  (6)  will  also  be  entered  on  line  12,  but  as  the 
amount  is  not  sufficient  to  warrant  a  withholding  of  the 
tax  by  the  lumber  company  the  item  will  be  placed  in 
column  B. 

Item  (7)  will  be  placed  on  line  25.  Brown  must  show 
this  item  in  his  return  because  he  is  subject  to  an  addi- 
tional tax.  If  his  net  income  (including  this  item)  were 
less  than  |20,000,  he  would  not  be  required  to  show  his 
income  from  corporate  dividends. 

Item  (8)  will  be  entered  on  line  20,  in  column  A. 

Item  (9)  will  be  entered  on  line  17,  in  column  A. 
Even  though  some  of  the  bonds  represented  by  this  item 
may  be  guaranteed  tax  free  the  entry  will  be  the  same, 
for  the  tax  on  the  interest  will  have  been  paid  at  the 
source  of  income  although  not  withheld  from  Brown's  in- 
terest by  the  debtor. 

Items  (10)  and  (11)  will  not  be  entered  at  all.  When 
the  original  Form  1040  was  issued,  it  was  subjected  to 
some  criticism  on  the  ground  that  no  place  was  provided 
for  the  deduction  of  these  items,  and  the  revised  form  also 
fails  to  provide  any  space  for  such  deduction.  In  this  re- 
spect, however,  the  forms  are  entirely  proper,  for  the  law 
is  explicit  with  respect  to  such  items,  and  does  not  pro- 
vide that  they  shall  be  "deducted,"  but  that  they  shall  be 
"excluded."  That  is,  for  income  tax  purposes,  income  from 
these  sources  is  absolutely  disregarded,  as  though  it  had 
no  existence.  / 

Item  (12)  will  be  entered  on  line  16,  column  A,  the 
tax  being  paid  by  the  mortgagor. 

Item  (13)  will  also  be  entered  on  line  16,  but  as  the 
amount  is  not  sufficient  to  impose  upon  the  mortgagor  the 


80  NEW  INCOME  TAX  MANUAL. 

duty  of  withholding  and  paying  the  tax,  the  item  will  be 
entered  in  column  B. 

Item  (14)  will  be  entered  on  line  15,  in  column  A, 
as  the  tenant  will  have  withheld  and  paid  the  tax. 

Item  (15)  will  also  be  entered  on  line  15.  But  al- 
though the  rents  from  the  apartment  building  aggregate 
f  9,000,  no  single  tenant  pays  a  sufficient  amount  to  sub- 
ject him  to  the  duty  of  withholding  and  paying  the  tax. 
Hence  the  sum  of  these  rents  will  be  placed  in  column  B. 

Item  (16)  will  not  be  entered  at  all.  The  law  ex- 
pressly provides  that  taxable  income  shall  not  include  "the 
value  of  property  acquired  by  gift,  bequest,  devise,  or 
descent." 

On  footing  up  the  columns,  as  clearly  indicated  on  the 
form.  Brown  will  obtain  the  following  results: 
Income  on  which  tax  has  been  paid  or  is  to  be 

paid  at  the  source  ( to  be  entered  on  line  23, 

in  column  A), $32,000.00 

Income  on  which  tax  has  not  been  paid  or  is 

not  to  be  paid  at  the  source  (to  be  entered 

on  line  23,  column  B), 150,000.00 


Aggregate  (to  be  entered  on  line  24),  |182,000.00 
Total  dividends  (to  be  entered  on  line  27), 10,000.00 


Total  gross  income  (to  be  entered  on 

line  28), $192,000.00 

Having  completed  his  itemized  statement  of  income. 
Brown  will  next  turn  to  page  3  of  the  return  and  state 
thereon  the  general  deductions  to  which  he  is  entitled. 
Taking  up  the  various  items  of  expenditures  and  losses 
already  enumerated,  he  will  treat  them  as  follows : 

Item  (a)  will  be  entered  on  line  29. 

Item  (b)  will  be  entered  on  line  30. 

Item  (c)  will  be  entered  on  line  31. 

Item  (d)  cannot  be  deducted,  and  no  entry  with  re- 
spect thereto  will  be  made.  While  Brown  will  probably 
feel  it  a  hardship  that  he  should  be  required  to  return  his 
speculative  gains  as  income,  but  not  allowed  to  make  any 


NEW  INCOME  TAX  MANUAL.  81 

deduction  for  his  speculative  losses,  the  law  and  the  regu- 
lations are  explicit  on  this  point. 

Item  (e)  represents  a  loss  while  is  allowable  as  a  de- 
duction, because  it  was  incurred  in  a  business  in  which 
Brown  was  regularly  engaged.  It  should  be  entered  on 
line  32,  and  as  item  (f )  properly  belongs  on  the  same  line, 
the  entry  will  be  the  sum  of  these  two  items.  Brown  will 
also  state  briefly  the  particulars  of  these  losses. 

Item  (g)  will  be  entered  on  line  33,  with  the  par- 
ticulars which  the  form  specifies. 

Item  (h)  will  be  entered  on  line  34,  with  a  statement 
of  the  kind  of  property  of  which  depreciation  is  claimed 
and  the  percentage  charged  to  depreciation. 

The  remaining  items,  (i),  (j),  (k),  and  (1)  will  not 
be  entered  at  all,  as  Brown  is  not  entitled  to  a  deduction 
on  account  of  any  of  these  items. 

Footing  up  his  general  deductions.  Brown  will  enter 
on  line  36,  the  total  general  deductions  to  which  he  is  en- 
titled,   182,000.00 

Turning  now  to  page  1  of  the  return  Brown  will  pro- 
ceed to  summarize  his  income  and  deductions  and  exemp- 
tions as  follows : 
He  will  enter  on  line  1,  his  total  gross  income, 

brought  from  line  28, $192,000.00 

On  line  2,  he  will  enter  the  amount  of  his  gen- 
eral deductions,  brought  from  line  36, 82,000.00 


On  line  3,  he  will  enter  the  difference  between 
these  amounts,  showing  his  net  taxable  income, 

so  far  as  the  additional  tax  is  concerned,.  .|110,000.00 
He  will  then  enter  the  deductions  and  exemptions  to 
which  he  is  entitled  in  computing  his  normal  tax,  as  fol- 
lows : 

On  line  4,  corporate  dividends,  brought  from 

line  27,  |10,000.00 

On  line  5,  income  on  which  the  tax  has  been 
paid  or  is  to  be  paid  at  the  source,  from 
line  23,  column  A, 32,000.00 


82  NEW  INCOME  TAX  MANUAL. 

On  line  6,  his  specific  exemption,  no  part  of 
which  he  has  claimed  before,  and  which, 
as  he  is  married  and  living  with  his  wife, 
amounts  to, 4,000.00 

The  total  of  these  deductions  and  exemptions 

he  will  enter  on  line  7, $46,000.00 

Subtracting  this  amount  from  his  total  net  in- 
come of  $110,000,  he  will  obtain,  and  enter 
on  line  8,  the  amount  on  which  the  normal 
tax  is  to  be  computed, $64,000.00 

He  will  now  have  no  difficulty  in  filling  out  the 
remainder  of  the  first  page  of  his  return, 
showing  that  his  additional  tax  is, 1,950.00 

And  his  normal  tax  is, 640.00 

Making  the  total  tax  which  he  must 

pay  directly,  $2,590.00 

Specimen  return.— On  the  following  pages  is  pre- 
sented a  photographic  reproduction  of  Brown's  return  as 
it  would  appear  when  fully  made  out  and  ready  to  be 
executed  and  delivered  to  the  Collector  of  Internal 
Revenue. 

He  must  file  this  return,  on  or  before  March  1st,  1915, 
in  the  3rd  District  of  New  York,  instead  of  in  the  2nd  Dis- 
trict, where  he  filed  his  return  for  1913. 


lOKFIllfDHBYCOllECTOit. 


NEW  INCOME  TAX  MANUAL. 
Form  1040  (Revised). 


Assessment  List  23-B^. — 


(Month.) 


INCOME  TAX. 


folif. 


Line. 


owtacd 


THE    PENAL.TY 

FOR  FAILURE  TO  HAVE  THIS  RETURN  IN 
THE  HANDS  OF  THE  COLLECTOR  OF 
INTERNAL  REVENUE  ON  OR  BEFORE 
MARCH  I  IS  $20  TO  $1,000. 

'  (see  instructions  on  PAOK  4.) 

UNITED   STATES  INTERNAL   REVENUE. 


83 

TO  K  nU£D  M  BY  INTQIUL  REYIM  BUSU. 
File  No 

Examined  by^-..     . 

Audited  by — . . 


district  and  date  received. 


IMPORTANT. 

Read  this  form  through  carefully. 

Fill  in  pages  2  and  3  before  making 

entries  on  first  page. 


RETURN  OF  ANNUAL  NET  INCOME  OF  INDIVIDUALS. 

(As  provided  by  Act  of  Congress,  approved  October  3, 1913.) 


INCOME  RECEIVED  OR  ACCRUED  DURING  THE  YEAk  ENDED  DECEMBER  31,  191^ 

tU«dby(orfor)...^fttfevv...f^/M^rW>V.. ,of..).^.3.  .W^tfitr.V.  5*rr  .$.>^. 

r\  .  ^-^         .  A  rstreet  and.number.V 


(Post-offlce  address. 


(Street  and.number.] 
(Statel 


COMPLETE  ANSWERS  SHOULD  BE  GIVEN  TO  THE  FOLLOWING  QUESTld-._. 
Did  you  fender  a  return  of  income  for  the  preceding  year?  \^A^  If  bo,  in  what  Internal  Revenue  District  was  it  filed?.  .V. .  J(*.  t*.*. . 
Were  you  tingle  or  ■married  with  wife  or  husband  living  with  you  on  December  31,  of  the  year  for  which  this  return  is  rendered? .  IiWa? 
JSM4'.^JU¥!\yf4tUKUt^  ytf^n^  n  mamed,  give  full  name  of  wife  or  husband  ...\VV«V<W .  /bla<c/fc4^VSn  .lf3vM*>Sp. . 


Has  jrour  wife  or  husband  income  from  eourcee  independent  of  your  own? 
Have  you  included  your  wife's  or  husband's  income  in  this  return? 


^^. 


1.  Gboss  Income  (brought  from  lino  28).. i 

2.  Gbhxbai.  DEDUcnoNS  (brought  from  line  36) . 
■S.  Net  Income 


ff.%0 


O 


PP.. 


CO 


Specific  deductions  and  exemptions  allowed  in  compnting  nonnal  tax  of  1  per  cent. 


4.  Dividends  (brought  from  line  27) 

5.  Income  on  which  the  nonnal  tax  has  been  paid  or  is  to  be  paid  at  the 

source  (brought  from  line  23,  Column  A) 


6.  Specific  exemption  of  |3,000,  or  $4,000,  as  the  case  may  be . 


Cm.im 


00 


0  oc 


Note. — If  separate  return  is  made  by  husband  or  wife  and  exemp- 1    '"''*°    ...»- 
tion  is  prorated,  state  amount  claimed  by:  I  Wife %. 


7.  Total  deductions  and  exemptions  (Items  4, 5,  and  6) 

8.  Taxable  Ikcome  on  which  the  normal  tax  of  1  per  cent  is  to  be  calculated  - 


4  4  0  0  0  oo 


oO 


NOTE. — When  the  net  income  shown  above  on  line  3  exceeds  $20,000  the  additional  tax  thereon  must  be  calculated  as  per  schedule  below. 


INCOME. 

Ti.X. 

One  per  cent  on  amount  over  $20,000  and  not  exceeding  $50,000 

Two  per  cent  on  amount  over  $50,000  and  not  exceeding  $75,000 

Three  per  cent  on  amount  over  $75,000  and  not  exceeding  $100,000 

Four  per  cent  on  amount  over  $100,000  and  not  exceeding  $250,000 

Mil 
$-. 
$-. 
$.- 
$-. 
$.. 
$.. 

\<m 

Ifc 

3 

% 
I. 

0 

y 
s: 

0 

H 
iP 

0 

p 
p 

<kIk 
P. 
p 

P 
P 

Kla 

0 

P 
P 
a 

C«iu 

.99. 
po. 

OC 

Uil 

$-. 
$.. 
$-. 
$.. 
$.. 
$.. 

Iloa 

__ 

n. 

-• 

wU 

B 

P 
P 

>: 
p 

c 
p 
p 
p 

Caao 
.P.P. 

P. 9 

Five  per  cent  on  amount  over  $250,000  and  not  exceeding  $500,000 

~ 

■■ 

■  ■ 

'-' 

- 

Six  per  cent  on  amount  over  $500,000 

■" 

.. 

$.. 
$.. 

$.. 

- 

- 

1 

4 

\f\ 

e 

OO 

10.  Total  normal  tax  (1  per  cent  of  amount  entered  on  line  8 

11.  Total  tax  to  be  paid 

) 

h 

0 

c 

00 

P.P. 

84 


NEW  INCOME  TAX  MANUAL. 
2 

GROSS  INCOME. 


This  statement  must  show  in  the  proper  spaces  the  ENTIRE  AMOUNT  of  gains,  profits,  and  inaome  received  by  or  acmied  to  the 
individual  from  all  sources  during  the  year  specified  on  page  1,  EXCEPT  income  derived  from  the  obligations  of  the  United  States  or 
«ny  of  its  possessions,  or  of  any  State  or  political  subdivision  thereof,  including  district  drainage  bonds;  and  amounts  paid  by  a  State 
or  any  pohtical  subdivision  thereof  for  services  rendered  as  an  o£Scer  or  employee. 


DESCRIPTION  OF  DJCOMB. 
NOTK. — ^If  hnstand  and  'vrire  render  separate  returns,  only  the  income  and  dedactlons 
of  the  husband  or  wito  (as  the  case  may  be)  -who  renders  tbU  return  shall  be  Included 
herein ;  but  it  separate  returns  are  not  rendered  by  both  husband  and  -wife  the 
Income  and  deductions  of  both  husband  and  vU*  ibail  be  included  separately  as 
proTldod  on  Uiis  form. 

A. 

Income  on  which  the  tax  has 
been  paid  or  is  to.be  paid 
at  the  source. 

B. 

Income  on  which  the  tax  has 
NOT  been  paid  or  is  not  to 
be  paid  at  the  source. 

ToTAi<  AxouNT  Dbbited  fbom — 

muh 
$.. . 

- 

TkMi 

mmim 

JT 

Hu 

0 

odn 

0 

0 

0>u 

06 

Mil 

1- 

Uou 

Tk. 

% 

ulivla 

Ca« 

13.  ProfessionB and  vocations........... ..................... ...... . 

^ 

ft 

r% 

iA 

„ 

9 

0 

e 

o 

0 

od 



14.  BmrineeB,  trade,  commerce,  or  sales,  or  dealings  in  property,  whether 

X 

y 

kk 

C 

% 

0 

0 

o 

0 

oc 

15.  Bents.. .^. ^..>.^.. ,.■ 

^ 

0 

0 

6 

oo 

? 

0 

0 

o 

oe 

18.  JnUrett  on  notes,  mortgages,  bank  deposits,  and  eecnritiee  other  than 

$ 

0 

0 

0 

06 

/ 

if 

0 

0 

od 

17.  Interest  on  bonds,  mortgages  or  deeds  of  trust,  or  other  similar  obliga- 
ti<Hi8  of  domestic  corporations,  joint  stock  companies  or  associa- 

i 

fJT 

0 

0 

0 

ec 

/ 

re 

--» 

^ 

L 

18.  Fiduciaries*  (excepting    dividends   from   domestic    corporations, 
Tvhirh  miiHt  i>A  inchid<^d  as  indicattyl  in  Iin6  ?^  hfilow). , 

X 

P: 

y^ 

«L 

__ 

•- 

A 

A 

-^ 

u 

^ 



IS.  Partnership  gains  and  prc^ts,  whether  distributed  or  not.    (Net  gains 

y 

*■ 

U 

«. 

1 

0 

0 

0 

oC 

20,  Interest  upon  bonds  issued  in  foreign  countries  and  upon  foreign 
mortgages  or  like  obligations  (not  payable  in  the  United  States), 
and  also  dividends  upon  the  stock  or  interest  upon  the  obligations 
of  foreign  corporations,  associations,  and  insurance  companies 

1 

0 

0 

0 

cO 

J 

ft 

•x 

o 

21,  Eoyalties  from  mines,  oil  wells,  patents,  franchisee,  or  other  legalised 

,.A 

"V 

-v 

\A 

V 

> 

■V- 

^ 

^ 

,V 

"A 

'%. 

U 

_ 

•• 

^ 

\ 

"A 

■^ 

l> 

^ 

Note.— State  here  sources  from  which  income  entered  on 

23.                       Totals  (Note. — Enter  total  of  Column  A  on  line  5) 

$... 

/ 

H 

0 

p 

6 

od 

$.. 

1 

s- 

0 

0 

0 

0 

.f.^ 

1 

i 

% 

0 

0 

0 
0 

q 

0 

0 
0 

o^ 

26.  Dividends  on  stock  or  from  the  net  earnings  of  domestic  corporations, 
joint  stock  companies,  associations,  or  insurance  companies  subject 

9-.  ■ 

Q 

0 

0 

p 

fiQ. 

26.  Dividends  received  through  fiduciaries  (see  line  18) 

00 

28.                     Total  Oross  Ikcoub  (to  be  entered  on  linel) 

pp. 

•  TlMnihauld  be  locloded  noder  thk  Item  aUliMWine  reoetv«d  tram  (oardlaiM,  tnoteat,  MteoDton,  edmiiilstretan,  amots,  rcoeivK«,«onMrvatan,  or  other  ptnoas. 
—  to  a  flduoiory  cepaoity. 


NEW  INCOME  TAX  MANUAL. 
3 


85 


GENERAL  BEDDCTIONS. 
NOTE. — Claims  for  deductions  can  not  be  allowed  unless  the  information  reqtiired  below  is  clearly  set  forth. 


29.  The  amount  of  necessary  expenses  actually  jtaid  -witliin  the  calendar  year,  for  which  the  return 
is  made,  in  carrying  on  any  individual  bv£i7uss.  There  must  not  be  included  under  this  head 
personal,  living,  or  family  expenses,  business  expenses  of  partnerships,  or  cost  of  merchandise. 
Amounts  paid  for  permanent  improvement  or  betterment  of  property  are  not  proper  expense 
deductions , 


Wife's  deduction , .« 

Note. — State  on  the  following  lines  the  principal  businesses  in  which  the  abovo  expenses 
■were  incurred.  . 


80.  All  interest  paid  within  the  year  on  personal  indebtedness  of  taxpayer. 
Wife's  deduction - 


31.  All  national,  State,  county,  school,  and  municipal  taxes  paid  within  the  year  (not  including  those 
assessed  against  local  benefits) 


Wife's  deduction. 


32.  Losses  actually  sustained  durine  the  year  incurred  in  trade  or  arising  from  fires,  storms,  or  ship- 
d  b:   ■ 


wreck,  and  not  'compensated 
Wife's  deduction. 


)y  insurance  or  otherwise. 


NoTB. — State  (a)  of  what  the  loss  consisted, 
(c)  how  it  was  determined  to  be  a  loss. 


(b)  when  it  was  actually  sustained,  and 


33.  Debts  past  due  which  have  beeH  actually  aecertaii 


33.  Debts  post 

ofi  within  the  year.. 

Wife's  deduction. 


[actually  ascertained  to  be  worthless  and  which  have  been  charged 


Note. — State  (a)  of  what  the  debts  consisted,  (6).  when  they  were  created,  (c)  when  they 
became  due,  and  {d)  how  they  were  actually  determined  to  be  worthless. 


J^.f:^flU%.fi^^^^^ 


or  of  property^tmsing  out 


34.  Amount  representing  a  reasonable  allowance  for  the  exhaustion,  wear  and  tear  of  property^tuising  out 
of  its  use  or  employment  in  business.  No  deduction  shall  be  made  for  any  amount  of  expense 
of  restorin)j  property  or  making  good  the  exhaustion  thereof  for  which  a  deduction  is  claimed 
elsewhere  in  this  return 


Wife's  deduction 

Note. — State  (a)  what  the  property  was  on  which  depreciation  is  taken  (if  buildings,  state 
when  erected,  of  what  material  constructed,  and  value  of  same,  as  of  January  1,  of  the  calendar 
year  for  which  this  return  is  rendered),  and  (6)  what  percentage  of  depreciation  is  claimed; 


35. ,  Amount  allowed  to  cover  depletion,  in  case  of  mines  and  oil  wells,  not  to  exceed  5  per  cent  of  the 
gross  value  at  the  mine  or  well  of  the  output  for  the  calendar  year  for  which  this  return  is  rendered . . 

Wife's  deduction -^ 

Note. — State  (o)  coetx>f  mine  or  well,  (6)  gross  value  at  the  mine  or  well  of  the  output  for 
the  calendar  year  for  which  this  return  is  rendered,  and  (c)  what  percentage  of  depletion  is 
claimed. 


36.  Total  "Gbnerai  Deductions'*  (tobe«nteredon.line2) , ♦. 

Nots.— BqiM»  is  insaOciatUiaraisirariiig  any  qiMstiaaf,«ttadt%«iippl«n)MitariiMit  to 


Od 


06 


Od 


0  6 


OS 


.^i 


m%P.9A 


oO 


9S  NEW  INCOME  TAX  MANUAL. 

Page   4  of  tlie   oflBLcial  form  contains  blank 
forms  of  verification  and  a  set  of  instructions. 
Total     burden      of     taxation.— If 

Brown  should  be  interested  in  computing 
the  total  burden  of  taxation  which  he  has 
to  bear,  he  will  see  that  to  the  tax  which 
he  pays  directly, |2,590.00 

He  must  add  the  tax  which  has  been  withheld 
by  others  from  income  which  he  would 
otherwise  have  received,  or  1%  of  $32,000,         320.00 

And  also  consider  that  he  really  bears  pro  tanto 
the  tax  of  the  corporations  from  which  he 
has  received  dividends  of  |10,000,  so  that 
he  must  add  1%  of  that  amount, 100.00 


Showing  his  total  burden  of  taxation 

to  be,   $3,010.00 

InconLe  of  wife.— If  Brown's  wife  had  any  sepa- 
rate income,  he  might  include  her  income  in  his  return, 
showing  the  items  separately  in  the  spaces  indicated  for 
that  purpose;  or,  if  her  separate  income  exceeded  |3,000, 
she  might  make  a  separate  return,  which  should  be  at- 
tached to  his. 

§42.      HOW  TO   OBTAIN  FORMS. 

Blank  forms  of  all  certificates,  returns,  etc.,  which  are 
required  will  be  furnished  by  Collectors  of  Internal 
Revenue  on  application;  or  corporations  and  others  may 
have  forms  conforming  to  the  oflflcial  forms  in  all  respects 
printed  for  themselves.     (T.  D.  1939;  T.  D.  1976) 

While  forms  should  be  furnished  to  all  corporations, 
etc.,  subject  to  the  tax,  on  or  before  Jan.  1st  of  each  year, 
the  failure  of  a  corporation,  etc.,  to  receive  a  blank  form 
will  not  excuse  it  from  making  a  return  or  relieve  it  from 
any  penalties  for  failure  to  make  a  return  at  the  proper 
time.     (G.  R.  163) 


87 


INDEX 

(References  are  to  pages.) 


ACCUMULATION  OF  INCOME: 

Consideration     for     purpose     of 
additional  tax,  22. 
ACTOR  OR  ACTRESS: 

Deduction    for    depreciation    of 
costumes    in    computing    in- 
come, 10. 
ADDITIONAL  TAX: 

Computation  of  in  case  of  hus- 
band and  wife,  4. 

Consideration  of  accumulation 
of  income  in  connection 
with,  22. 

Exemption  of  compensation  of 
pubHc  officers  and  employees 
applicable  to,  25. 

Exemption  of  interest  upon  pub- 
lic securities  applicable  to, 
25. 

Not  collected  at  the  source  of 
income,   50. 

Rates   of,  4. 

Specific   exemption   not   applica- 
ble to,  24. 
ADMINISTRATION : 

Expenses   of   not   allowable    de- 
ductions  in   return   of   fidu- 
ciary, 39. 
ADMINISTRATOR: 

Duty  to  make  return  for  dece- 
dent, 29,  35. 

See  also  FIDUCIARY. 
AGENT : 

Duty  with  respect  to  withhold- 
ing tax,  50. 

Not  ordinarily  included  in 
meaning  of  term  "fiduciary," 
29,  72. 

Signing    of    certificate    of    own- 
ership by,  57. 
AGRICULTURAL  ASSOCIA- 
TION: 

What  is,  within  exemption,  2. 
ALIEN : 

Residing  in  United  States  sub- 
ject to  tax,  1. 

See       also      NON-RESIDENT 
ALIEN. 
ALIMONY : 

Paid,  not  deductible  in  comput- 
ing income,  11. 

Received,  to  be  included  as  in- 
come, 6.  ^ 

Tax   on  to  be  withheld  at  the 
source,  51. 
ANNUAL  LIST  RETURN: 

See  LIST  RETURN. 
ANNUITY : 

When  to  be  included  as  in- 
come, 6. 


APPEAL: 

From    decision    of    Collector   of 
Internal  Revenue  increasing 
amount    shown    by     return, 
44. 
APPLICATION: 

For    license    to    collect    income 
arising  in  foreign  countries, 
68. 
ASSESSMENT: 

Local  or  special,  not  deductible 
in  computing  income,  8. 

Of  income  tax: 

By  whom  made,  47. 
Notice  of,  47,  76. 

On     corporate     stock,     not     de- 
ductible   in     computing    in- 
come, 11. 
ASSETS : 

Appreciation  in  value,  when  in- 
come, 7,  14. 

Capital    assets     of     corporation, 
mode  of  computing: 
Loss  on  sale  of,  17. 
Profit  on  sale  of,  14. 
ASSOCIATION: 

See  CORPORATION. 
ATTORNEY: 

Filing  of  certificate  by,  53. 
BAD  DEBT: 

Debt  charged  off  as,  to  be  in- 
cluded as  income  if  after- 
wards collected,  17. 

Deductible  in  computing  income, 
10,   17. 
BANK : 

Deduction  of  interest  paid  in 
computing  income,  20. 

Not  entitled  to  deduct  reserve 
for  guaranty  of  depositors 
in  computing  income,  16. 

Not  required  to  withhold  tax 
from  interest  on  deposit,  51. 

Right   to: 

Deduct  taxes  assessed 
against  stockholders,  20. 
Execute  claim  of  exemption 
with  respect  to  foreign  in- 
come on  behalf  of  non-resi- 
dent alien,  70. 

To    return    interest    on    deposits 
as  expense  of  business,  37. 
BENEFICIARY : 

Duty  to  show  in  return  amount 
received  from  trust,  33. 

Particulars    as   to   in    return   of 
fiduciary,  38. 
BEQUEST : 

See  GIFT;  LEGACY. 


88 


INDEX. 


BETTERMENT : 

Amount    expended    for   not    de- 
ductible   in     computing    in- 
come,  20. 
BOARD  OF  EDUCATION: 

Duty    to   withhold   tax   on   rent 
of      property      leased      for 
school  district,  66. 
BOND: 

Furnished  by  employee,  deduc- 
tion of  premium  from  in- 
come, 8. 

Guaranteed  free  of  taxation, 
how  income  from  returned, 
35. 

Name  and  address  of  owner  to 
be  shown  in  monthly  list  re- 
turn of  withholding  agent, 
40. 

Of  licensee  to  collect  foreign  in- 
come, 69. 
BONUS : 

To    employees,   when    deductible 
in  computing  income,  20. 
BOOKS  AND  PAPERS : 

Compelling  production  of,  44. 
BUILDING    AND    LOAN    ASSO- 
CIATION: 

When  entitled  to  exemption,  3. 
BUSINESS: 

Expenses  of  deductible  from  in- 
come, 8,  IS. 
CAPITAL  ASSETS: 

See  ASSETS. 
CAPITAL  STOCK: 

Amount  of  to  be  shown  in  cor- 
porate return,  35. 
CERTIFICATE: 

Color,   52. 

Filing  by  attorney,  53. 

Form  of,  generally,  52. 

Not  subject  to  stamp  tax,  53. 

To  accompany  coupon  or  in- 
terest order  on  bond  owned 
by  non-resident  alien,  62. 

See   also   SUBSTITUTE   CER- 
TIFICATE. 
CERTIFICATE      OF      OWNER- 
SHIP: 

Disposition  of: 
Generally,  63. 

Where    substitute    certificate 
used,  58. 

Forwarding  by  collecting  agent, 
57. 

Language  of,  62. 

Mode  of  signature,  56. 

Necessity  for  showing  street 
address,  57. 

Need  not  be  attached  to  coupons 
from  public  securities,  67. 

Numbers  of  bonds  need  not  be 
shown,  63. 


CERTIFICATE  OF  OWNERSHIP 

(Cont.)  : 

Separate  certificate  for: 

Coupons    maturing    at    dif- 
ferent  dates,  62. 
Each  issue  of  bonds,  56. 

Signing  by  agent,  57. 

Substitution  of  collecting  agent's 
certificate  for,  57. 

To  be  forwarded  to  Collector  of 
Internal  Revenue  where 
owner  of  bonds  not  subject 
to  have  tax  withheld  at 
source,  41. 

CITIZEN : 

Subject  to  tax,  1. 
Who  is,  1. 
CITY: 

Bonds    or    securities    issued    by, 
see  PUBLIC  SECURITIES. 
Exemption    of    compensation    of 
officers  and   employees,  24. 
CLERGYMAN : 

What  to  be  included  as  income 
of,  7. 
CLUB: 

Right   to   exemption   and   estab- 
lishment thereof,  3. 
COLLATERAL: 

Deduction  of  interest  on  obliga- 
tions secured  by  in  comput- 
ing corporate  income,  19. 
COLLECTION  AT  THE 
SOURCE : 
Generally,  49. 

Amount     on     which     tax     col- 
lected, 50. 
Applicable   to   normal   tax   only, 

50. 
As    affecting   duty   to   make   in- 
dividual return,  28. 
Duty   of   person   withholding  to 

make  return,  29. 
Items   on   which   tax   not   with- 
held,  53. 
Not  applicable  to  income  of: 
Corporation,  51. 
Partnership,  51,  75. 
Of  tax  on : 

Income    arising    in    foreign 

countries,  68. 
Income    of    estates    held    in 

trust,  71. 
Income  other  than  interest 
on  bonds,  mortgages, 
etc.,  of  corporations, 
etc.,  or  income  of  estates 
held  in  trust  or  arising 
in  foreign  countries,  64. 
Interest  on  bonds,  mort- 
gages, etc.,  of  corpora- 
tions, associations,  etc., 
55. 


INDEX. 


89 


COLLECTOR   OF   INTERNAL 
REVENUE : 

Increase    by   of    amount    shown 
by  return,  44. 
COLOR: 

Of    certificates  used   in  connec- 
tion   with    collection   at   the 
source,   52. 
COMMERCIAL  PAPER: 

Of    corporation,    withholding   of 
tax  on  interest,  55. 
COMMISSION: 

In    what    year    returned    as    in- 
come, 34. 
On  renewal  insurance  premiums 

included  as  income,  6. 
To  real  estate  agent,   deductible 
in  computing  income  of  in- 
dividual paying,  8. 
To  salesman : 

Deductible   from   income   of 

employer,  8. 
Included  as  income  of  sales- 
man, 6. 
Withholding  of  tax  on,  54. 
COMMISSIONER  OF  INTERNAL 
REVENUE : 

Return  by  for  delinquent,  44. 
To  assess   tax,   47. 
To  prescribe  form  of  return,  22. 
COMPENSATION: 

For  fixed   period,  in  what  year 

returned,  34. 
For  service  which  must  be  com- 
pleted   before    payment    due, 
in   what  year   returned,  34. 
Of  public  officers  and  employees : 
Exempt  from  tax,  24. 
Not   to    be    included    in   re- 
turn, Z2>. 
CONSERVATOR: 

See  FIDUCIARY. 
CO-OPERATIVE  COMPANY: 

Computation  of  income  of,  21. 
CO-OPERATIVE  DAIRY: 
Computation  of  income,  21. 
Not  exempt,  3. 
CORPORATE     OBLIGATIONS, 
COLLECTION  OF  TAX  ON : 
Generally,    55. 

Obligations   of   exempt   corpora- 
tion, etc.,  62. 
Obligations  owned  by: 
Corporation,  61. 
Non-resident  alien,  61. 
Partnership,   61. 
On    what    obligations    tax    col- 
lected at  the  source,  55.    , 
Securities  guaranteed  free  from 

taxation,  64. 
When  tax  to  be  withheld  by: 
Debtor  or  fiscal  agent,  56. 
First  collecting  agency,  59. 
Where  bonds  retired,  63. 


CORPORATE     OBLIGATIONS, 

COLLECTION    OF    TAX    ON 

(Cont.)  : 

Where  checks  for  registered  in- 
terest sent  out,  58. 

Where  interest  coupons  ex- 
changed for  funding  bonds, 
63. 

CORPORATE  RETURN: 

Generally,   35. 
CORPORATION : 

Amount  on  which  taxable,  5. 

Computation  of   income  of,  13. 

Consideration  of  sales  of  own 
stock  in  computing  income, 
21. 

Designation  of  fiscal  year,  see 
FISCAL    YEAR. 

Duty   to   make   return,   27. 

Establishment  of  right  to  ex- 
emption, 3. 

Examination  of  books,  45. 

Exempt  from  tax,  see  EXEMPT 
ORGANIZATION. 

Exemption  of  interest  upon  pub- 
lic securities  applicable  to 
securities  owned  by,  25. 

Failure  to  receive  form  no  ex- 
cuse for  failure  to  make  re- 
turn, 86. 

Foreign,  see  FOREIGN  COR- 
PORATION. 

In  existence  only  part  of  year, 
bound  to  make  return,  28. 

Individual  mortgage  assumed 
by  does  not  become  corpor- 
ate obligation  for  purpose  of 
withholding  tax,  66. 

Not  entitled  to  specific  exemp- 
tion, 23. 

Return  of  as  fiduciary,  38. 

Tax  not  withheld  on  bonds 
owned  by,  61. 

Tax  on  income  of  not  collected 
at  the   source,  51. 

To  whom  return  made  by,  31. 

Transacting  no  business,  bound 
to  make  return,  28. 

When  to  pay  tax,  48. 
COSTUMES : 

Deduction  for  depreciation  of  in 
computing   income   of   actor 
or  actress,  10. 
COTTON : 

When  loss  on  may  be  deducted 
in   computing  individual   in- 
come, 10. 
COUNTIES : 

Exemption    of   compensation    of 
officers  and  employees,  24. 
DAIRY: 

See  CO-OPERATIVE  DAIRY. 


9a 


INDEX. 


DEATH: 

Return  of  decedent  to  be  made 
by     executor     or     adminis- 
trator, 35. 
DEBT: 

See  BAD  DEBT. 
DEBTOR: 

Meaning  of  term,  50,  56,  64. 
DEDUCTIONS: 

Allowable  in  computing  income, 

8,  15. 
Claim  of  with  respect  to  income 
taxable  at  the  source,  SO,  61, 
67,  70. 
Not  authorized  in  computing  in- 
come, 11,  20. 
Penalty   for  making  false  state- 
ment   or    fraudulent    repre- 
sentation to  obtain,  75. 
Statement     for    by    withholding 
agent,  67. 
DELAY  IN  MAILS: 

Not  chargeable  to  person  mak- 
ing  return,   31. 
DEPOSIT: 

In    bank   or   other   financial   in- 
stitution, not  to  be  returned 
by   corporation   as   indebted- 
ness, 36. 
Interest   on    to    be    stated    sepa- 
rately in  return  of  bank,  37. 
Tax  on  interest  not  collected  at 
the  source,  51. 
DEPRECIATION : 

Deduction  for  in  computing  in- 
come, 10,  17. 
DEVISE  OR  DESCENT: 
Property  acquired  by : 

Income  from  taxable,  6. 
Tax   not  withheld   on   value 

of,  54. 
Value    of    not    included    as 

income,  6. 
Value  of   not   to   be   shown 
by  return,  33. 
DISCLOSURE: 

Of  information  contained  in  re- 
turn: 

Penalty  for,  76. 
Prohibited,  45. 
DISTRIBUTION: 

To  beneficiaries  not  necessary  to 
impose   upon   fiduciary   duty 
of  making  return,  39. 
DIVIDENDS : 

Deduction    of   in   computing   in- 
dividual income  for  purpose 
of  normal  tax,  11. 
Not  subject  to  tax  in  hands  of 

fiduciary,   73. 
Not    to    be    included    in    return 
of   individual  unless   subject 
to   additional   tax,   33. 


DIVIDENDS    (Cont.): 

Of  foreign  corporation  wholly 
engaged  in  business  in 
United   States,   status,  71. 

Receipt  of  as  affecting  duty  to 
make  return,  28. 

Received,  to  be  included  in  cor- 
porate income,  14. 

Tax  on  not  withheld  at  the 
source,  53. 

When  to  be  shown  in  fiduciary 
return,  39. 
DONATION : 

Consideration  in  computing  cor- 
porate income,  16,  20. 
EMPLOYEE: 

Amount  received  by  for  surren- 
dering contract  of  employ- 
ment to  be  included  as  in- 
come, 7. 

Deduction  from  income  of  pre- 
mium on  bond  furnished,  8. 

Deduction  of  bonus  to,  or  shar- 
ing of  profits  with,  in  com- 
puting corporate  income,  20. 

Gift,  donation,  or  endowment 
for  benefit  of,  deductible  in 
computing  corporate  in- 
come, 20. 

Of  exempt  organization,  tax  not 
withheld   from   salary,  7. 

Of  state  or  political  subdivision 
thereof : 

Exemption      of      compensa- 
tion, 24. 
Tax  not  withheld  from  com- 
pensation, 54. 

Tax  not  withheld  on   salary  of 
foreign     employee     of     do- 
mestic corporation,  54. 
ENDOWMENT: 

Not     deductible     in     computing 
corporate  income,  20. 
ENDOWMENT  CONTRACT: 

When  amount  received  under  to 
be  included  as  income,  6. 
EXECUTOR: 

Duty  to  make  return  for  dece- 
dent, 29,  35. 

See  also  FIDUCIARY. 
EXEMPT  ORGANIZATION: 

Certificate  to  accompany  cou- 
pons from  bonds  of,  62. 

Not  required  to  withhold  tax, 
7,  52. 

Salary  paid  by  to  be  included 
as  income,  7. 

What   is,   2. 
EXEMPTION: 

Certificate  claiming  to  be  on  yel- 
low paper,  52. 

Claim  of  with  respect  to  reg- 
istered interest,   59. 

Establishment  of  right  by  cor- 
poration, 3. 


INDEX. 


91 


EXEMPTION  (Cont.): 

From  withholding  of  tax,  how 
claimed,  61,  62,  67,  69,  70. 

Of  compensation  of  public  of- 
ficers and  employees,  24. 

Of  interest  upon  public  securi- 
ties, 25. 

Penalty  for  making  false  state- 
ment or  fraudulent  repre- 
sentation to  obtain,  75. 

Statement  for  by  withholding 
agent,  67. 

What  corporations  entitled  to,  3. 

See   also   SPECIFIC  EXEMP- 
TION. 
EXPENSE: 

Of  administration  not  an  allow- 
able deduction  in  return  of 
fiduciary,  39. 

Of  conducting  business: 

Deductible    from   income,   8, 

15. 
To  be  shown  by  return,  36. 
FARM  BUILDING: 

Deduction    for    depreciation     of 
in   computing  individual   in- 
come, 10. 
FARMERS'    INSURANCE    COM- 
PANY: 

Computation  of  income  of,  21. 
FIDUCIARY: 

Claim  by  of  exemption  from 
withholding  with  respect  to 
income  arising  in  foreign 
country,   70. 

Corporate  dividend  not  taxable 
in  hands  of,  73. 

Duty  to  withhold   tax,   71. 

Election  by,  as  to  whether  debtor 
or  withholding  agent  shall 
withhold  tax,  72. 

Meaning   of    term,   38,   71. 

Personal : 

Liability  for  tax  on  income 

of  trust  estate,  71. 
Return  by,  as  agent  of  ben- 
eficiary,  40. 

Return  of,  see  FIDUCIARY 
RETURN. 

Withholding  of  tax  on: 

Income     payable     to     gen- 
erally, 54. 
Rent  payable  to,  66. 
FIDUCIARY  RETURN: 

Generally,  38. 

Duty   to   make,  28,   38. 

To   whom   made,   32.  ' 

What  income  to  be  included 
in,   39. 

Where   fiduciary   acts   for  bene- 
ficiary in  more  than  one  es- 
tate or  trust,  39. 
FISCAL  AGENT: 

Appointment  of  by  debtor,  56. 


FISCAL  YEAR: 

How  designated,  46. 

Mode  of  change  from  calendar 
year  to,  46. 

Necessity  for  designation,  46. 

Right  of  corporation  to  desig- 
nate, 46. 

Time  for  designating,  46. 
FOREIGN  CORPORATION: 

Computation  of  income  of,  21. 

Extent  to  which  interest  on  in- 
debtedness allowable  as  de- 
duction, 19. 

Income  on  which  taxable,  5. 

Liability  to  tax,   1. 

What  income  to  be  shown  in 
return,  36. 

Wholly   engaged   in   business   in 
the  United  States,  status  of 
dividends,  71. 
FOREIGN  COUNTRY: 

Taxes   imposed   by  to  be   sepa- 
rately    shown    in    corporate 
return,  37. 
FOREIGN     INCOME,     COLLEC- 
TION OF  TAX  ON: 

Generally,  68. 

By  whom   tax   withheld,   69. 

Indorsement  of  foreign  item,  69. 

License   for   collection,   68. 

List  return  of  person  or  cor- 
poration collecting,  42. 

Records  to  be  kept  by  licensee, 
71. 

Where   interest   payable   in   the 
United  States,  70. 
FORMS: 

Failure  of  corporation  to  receive 
no  excuse  for  failure  to 
make  return,  86. 

Of  certificates  for  use  in  con- 
nection with  collection  at 
the  source,  52. 

Of  returns,  32,  35,  38. 

Private,  must  conform  to  of- 
ficial forms,  86. 

To    be    furnished    by   collectors, 
86. 
FRUIT     GROWERS'     ASSOCIA- 
TION: 

When  entitled  to  exemption,  3. 
FUNDING  BONDS: 

Effect  of  exchange  of  interest 
coupons  for,  63. 

GAINS : 

Derived  from  gift  taxable,  6. 

GENERAL    INCOME,     COLLEC- 
TION AT  THE  SOURCE  OF 
TAX  ON: 
Generally,   64. 
By  whom  tax  withheld,  64. 
When  and  how  tax  deducted,  63. 


92 


INDEX. 


GIFT: 

Not  deductible  in  computing  in- 
come of  donor,  11,  20. 
Property  acquired  by: 

Gains,     profits,     or     income 

from  taxable,  6. 
Value    not    included    as    in- 
come of  individual,  6. 
Value  not  included  in  return 
of  individual,  33. 
Tax  not  withheld    from    value 

of,  54. 
To  corporation,  included  as  in- 
come, IS. 
GOOD  WILL: 

To  be  eliminated  in  calculating 
depreciation     of     corporate 
property,  18. 
GOVERNMENT  OFFICERS  AND 
EMPLOYEES : 

Payments  to,  which  are  not  sub- 
ject to  withholding  of  tax, 
51. 
Special  provisions  with  respect 
to  computation  of  income 
of,  12. 
GRAIN : 

When  loss  on  may  be  deducted 
in  computing  income,   10. 
GRATUITY: 

Payment  to  widow  of  employee 

GROSS  INCOME: 

Of    corporation,    13. 
Of  individual,  5. 
GUARANTY  FUND: 

Maintained  by  bank  not  deduct- 
ible in  computing  income,  16. 
GUARDIAN : 

Personal  return  by  for  ward,  39. 
See  also  FIDUCIARY. 
HORTICULTURAL   ASSOCIA- 
TION: 

What  is  within   exemption,  2. 
HUSBAND  AND  WIFE: 

American  woman  marrying  for- 
eigner   not    entitled   to   spe- 
cific exemption,  24. 
Computation    of    additional    tax 

on  income   of,  4. 
Return   of   income   of,   27. 
Specific      exemption      allowable 
from  joint  incomes  of,  23. 
IDENTITY: 

Of  person  tendering  coupon  for 
collection  to  be   established, 
57. 
IMPROVEMENT: 

Amount   expended    for   not    de- 
ductible    in     computing    in- 
come, 11,  20. 
Loss   incident  to  not  deductible 
in  computing  income,  17. 


INABILITY: 

Of    individual    to    make    return, 
return  by  representative  au- 
thorized, 34. 
INCOME: 

Computation   of   income   of : 
Corporation,  13. 
Individual,  5. 
Non-resident  alien,  13. 
From   bond   guaranteed   free   of 
taxation,    how    returned,   35. 
From  property  acquired  by  gift, 
bequest,    devise,    or    descent, 
taxable,  6. 
Not    subject    to    withholding    at 
the    source    when   not   fixed 
or    certain    and    payable    at 
stated   periods,   S3. 
Of   beneficiary   to   be   shown   in 

return  of  fiduciary,  38. 
Of   corporation  to  be  shown  in 

return,   36. 
To    be    included    in    return    of 
fiduciary,  39. 
INCOME  TAX: 

Additional,  rates  of,  4. 
Amount    on   which   payable,    5. 
Assessment  of,  47. 
By  and  to  whom  paid,  47. 
Normal,   rate   of,   4. 
Receipt  for  payment,  49. 
Time  and  mode  of  payment,  48. 
INCREASE: 

Of  amount  shown  by  return,  44. 
INDEBTEDNESS: 

Amount    of,    interest    on    which 
may  be  deducted  in  comput- 
ing  corporate   income,    18. 
Deduction  of  interest  on  in  com- 
puting individual   income,  8. 
Deposits    in    banks    and    finan- 
cial  institutions   not   return- 
ed as,  36. 
Secured  by  collateral,  interest  on 
to   be   returned  by   corpora- 
tion as  expense  of  business, 
36. 
To  be   shown   in   corporate   re- 
turn, 35. 
INDIVIDUAL: 

Amount  on  which  taxable,  5. 
Deductions    allowed    in    comput- 
ing income,  8. 
Having    income    not    exceeding 

$3,000   exempt,   3. 
Income  of,  how  computed,  5. 
INDIVIDUAL  RETURN: 
Generally,  32. 
Duty  to  make,  27. 
Form  to  be  used  in  making,  35. 
Income    items    not     to     be     in- 
cluded in,  33. 
Practical    illustration    of    prepa- 
ration of,  77. 


INDEX. 


93 


INDIVIDUAL  RETURN   (Cont.)  : 
Specimen  return,  reprint  of,  83- 

85. 
To  whom  made,  31. 
INSPECTION: 

Of  books  of  corporation,  45. 
Of  returns,  45. 
INSTALLMENTS : 

Stock  payable  in,  to  what  extent 
included     in     corporate     re- 
turn, 35. 
INSURANCE: 

On  leased  property,  deduction  of 
premium    in    computing    in- 
come of  owner,  8. 
See  also  LIFE  INSURANCE. 
INSURANCE  COMPANY: 

Deduction   for  loss  or  deprecia- 
tion allowed  to,   18. 
Form   for  return  of,  38. 
Mutual,  not  exempt,  3. 
INTEREST: 

On  corporate  indebtedness : 

Deductible  in  computing  in- 
come,  18. 
To  be  shown  in  return,  36. 
On  deposit  in  bank: 

Deductible  in  computing  in- 
come, 20. 
Not  taxable  at  the    source, 

51. 
To   be   stated   separately   in 
return  of  bank,  37. 
On  indebtedness  secured  by  col- 
lateral, how  returned  by  cor- 
poration, 36,  37. 
On   individual   indebtedness,   de- 
ductible   in     computing     in- 
come, 8. 
On   mortgage    assumed   by   mu- 
nicipality, not  exempt,  25. 
On   mortgage,   paid  by  corpora- 
tion in  lieu  of  rent: 
Deductible  in  computing  in- 
come, 16. 
To   be   returned   as   expense 
of  business,  37. 
On   public   securities,   exemption 

of,  25. 
Received,  to  be  included  in  cor- 
porate income,  14. 
INTEREST   CHECK: 

Indorsement  on  with  respect  to 
income  tax,  59. 
INTEREST  COUPONS: 

Effect  of  exchange  for  funding 
bonds,  63.  / 

INVESTMENT  CERTIFICATE: 
Interest  on  subject  to  withhold- 
ing, 55. 
JOINT  FIDUCIARIES: 

Any  one  may  make  return,  38. 
JOINT-STOCK  COMPANY: 
See  CORPORATION. 


JUDGE: 
See       UNITED      STATES 
JUDGE. 
LANDLORD: 

Right  to  file  claim  for  exemp- 
tion or  deductions  with  ten- 
ant, 67. 
LAWYER: 

When  tax  to  be  withheld  at  the 
source,  on  payments  to,  53. 
LEASED   PROPERTY: 

Computation    of    corporate    in- 
come from  operation  of,  15. 
See  also  RENT. 
LEGACY: 

Income  from  taxable,  6,  7. 
Tax  not  withheld  on  value  of, 

54. 
Value  not  included  in: 
Individual  income,  6. 
Individual  return,  33. 
See  also  GIFT. 
LESSEE : 

Duties  with  respect  to  withhold- 
ing tax  on  rent,  65. 
LICENSE: 

For  collection  of  income  arising 

in  foreign  countries,  68. 
Penalty  for  engaging  in  business 
of     collecting     foreign     in- 
come without,  76. 
LIFE  INSURANCE: 

On   lives    of    corporate   officers 
and  employees : 
Premiums  deductible  in  com- 
puting income,  16. 
Proceeds  to  be  returned  as 
income,   15. 
On  lives  of  partners: 

Premiums  deductible  in  com- 
puting    partnership     in- 
come,  75. 
Proceeds   to   be   included  in 
partnership   income,   75. 
Premium  not  deductible  in  com- 
puting individual  income,  11. 
Proceeds   not  included  in  gross 

income  of  individual,  5. 
Proceeds    not    subject    to    with- 
holding at  the  source,  53. 
Proceeds  not  to  be  included  in 

individual  return,  33. 
When  amount  received  under  to 
be  included  as  income,  6. 
LIMITED  PARTNERSHIP: 

Considered   as    corporation   and 
taxable  as  such,  75. 
LIST  RETURN: 
Generally,   40. 
Form  and  contents  of: 

Annual  list  return,  41,  42,  43. 
Monthly  list  return,  40,  41, 
42. 
Separate  monthly  list  return  for 
each  issue  of  bonds,  41. 


94 


INDEX. 


LIST  RETURN  (Cont.) : 
Time  for  filing,  30. 
To  show  name  and  address  of 

owner  of  coupons,  41. 
When  to  show  name  and  address 
of    person    presenting    cou- 
pons,  42. 
With    respect    to    income    other 
than  from  corporate  obliga- 
tions or  foreign  sources,  42. 
LIVING  EXPENSES: 

Not  deductible  in  computing  in- 
come, 11. 
LOAN  OR  TRUST  COMPANY: 
Deduction    of    interest    paid    in 
computing  income,  20. 
LOCAL  ASSESSMENT: 

Not  deductible  in  computing  in- 
come, 8,  20. 
LOSS: 

Deductible     in     computing     in- 
come, 9,  16. 
To  be  shown  by  return,  36. 
MAINTENANCE: 

Of   corporate  property,   expense 
of  deductible    in    computing 
income,  15. 
MILEAGE: 

In  excess  of  actual  expenses  to 

be  included  as  income,  6. 
Tax  not  withheld  from  payments 
on  account  of,  54. 
MINING  COMPANY: 

Deduction    for    depreciation    al- 
lowable to,  18. 
MODE: 

Of  payment  of  tax,  48. 
MONTHLY  LIST  RETURN: 

See  LIST  RETURN. 
MORTGAGE: 

Assumed  by  municipality,  inter- 
est on  not  exempt,  25. 
Of  individual  assumed  by  cor- 
poration, not  a  corporate  ob- 
ligation for  purpose  of  with- 
holding tax,  66. 
MUTUAL  COMPANY: 

Computation  of  income  of,  21. 
Mutual    insurance   or    telephone 
company  not  exempt,  3. 
NON-RESIDENT: 
Subject  to  tax,  1. 
To  whom  return  made  by,  31. 
NON-RESIDENT  ALIEN: 

Qaim  of  exemption  with  respect 
to  foreign  income  on  behalf 
of,  70. 
Computation  of  income  of,  13. 
Duty  of  local  representative  to: 
Make  return   for,  30. 
Pav  tax  for,  48,  50. 
Form  tor  use  of  in  claiming  ex- 
emption with  respect  to  divi- 
dends  of     foreign    corpora- 
tions payable  in  the  U.  S.,  71. 


NON-RESIDENT  ALIEN  (Cont.) : 

Income  on  which  taxable,  5. 

Liability  to  tax,  1. 

Not  entitled  to  specific  exemp- 
tion, 24. 

Personal  return  for  by  fiduciary, 
40. 

Tax  not  withheld  on  income  from 
corporate  obligations  owned 
by,  61. 
NORMAL  TAX: 

Deductions  allowed  in  comput- 
ing individual  income  for,  in 
addition  to  deductions  for 
purpose  of  additional  tax, 
11. 

Rate  of,  4. 
NOTICE: 

By  fiduciary  to  debtor  or  with- 
holding agent: 
Authorizing    withholding   of 

tax,  72,  73. 
Precluding    withholding     of 
tax,  72,  73. 

Of  assessment  of  tax,  47,  76. 
OFFICER: 

Of  corporation,  extent  to  which 
salary  deductible  in  comput- 
ing corporate   income,    15. 

Or  enlisted  man,  what  pay  sub- 
ject   to    withholding    at  the 
source,  52. 
PARTNERSHIP: 

Insurance  on  life  of  partner : 
Premium     deductible     from 

partnership  income,  75. 
Proceeds   to  be   included   in 
partnership  income,  75. 

Limited  partnership  taxable  as 
corporation,   75. 

Member  to  include  share  of  earn- 
ings in  personal  return,  32, 
74. 

Not  taxable  as  such,  3,  74. 

Provisions  with  respect  to,  gen- 
erally,  74. 

Share  of  individual  partner  in 
profits  taxable,  whether  or 
not  profits   divided,  3,  74. 

Statement  of  gains  and  profits 
by,  74. 

Tax  not  withheld  on  corporate 
obligations  owned  by,  61. 

Tax  on  income  of  not  collected 
at  the  source,  51,  75. 
PAYMENT  OF  TAX: 

By  and  to  whom  made,  47. 

Mode  of,  48. 

Penalty    for   delay,   48. 

Receipt  for,  49. 

Time   for,  48,  76. 

When  to  be  made  irnmediately 
upon  receiving  notice  of  as- 
sessment, 48. 


INDEX. 


95 


PENALTIES: 

For  various  violations  of  Income 
Tax  Law,  75,  76. 
PENSION : 

Paid,  deductible  in  computing  in- 
come, 15. 
Received,  included  in  taxable  in- 
come, 6. 
POWER  OF  ATTORNEY: 

Person  holding  not  authorized  to 
sign     certificate     precluding 
withholding  of  tax  by  debtor 
or  withholding  agent,  73. 
PREMIUM : 

On  bond  furnished  by  employee, 
deductible   from  income,  8. 
See  also  INSURANCE;  LIFE 
INSURANCE. 
PRESIDENT   OF  THE  UNITED 
STATES: 
Compensation   of : 

Exempt  from  tax,  24. 

Not  to  be  included  in  return, 

33. 
Tax  not  withheld  from,  54. 
PROFITS : 

Derived   from  gift  taxable,  6. 
Distributed  to  employees,  taxable 

at  the  source,  51. 
From  sale  of  real  estate,  compu- 
tation of,  12. 
PROFIT-SHARING: 

With  employees  of   corporation, 
deduction   for  in   computing 
corporate  income,  20. 
PROMISSORY  NOTE: 

In  payment  of  rent,  withholding 
of  tax,  68. 
PUBLIC   OFFICERS: 
Compensation   of : 

Exempt  from  tax,  24. 
Not  to  be  included  in  return, 
33. 

Tax  not  withheld  from,  54. 
PUBLIC  SECURITIES: 

Coupons   from  need  not  be  ac- 
companied by  certificates  of 
ownership,  67. 
Interest  on: 
Exempt,  25. 

How  treated  in  corporate  re- 
turn, 36. 
Not_  included    in    corporate 

income,   14. 
Not  included    in    individual 

return,  ZZ. 
Tax  not  withheld  from,  54, 
56,  60. 
PUBLIC  UTILITY: 

Amount  paid  from  earnings  of 
to  state,  territory,  city,  etc., 
deductible  in  computing  cor- 
porate income,  16. 
Exemption  of  income  derived 
from  operation  of,  26. 


PUBLICATION : 

Of  information  contained  in  re- 
turn, 45. 
PURCHASED    PROPERTY: 

Computation    of    corporate    in- 
come from  operation  of,  15. 
QUARTERS : 

Rental   value  of  living  quarters 
furnished  to  be  included  as 
income,  7. 
REAL  ESTATE: 

Computation  of  profit  from  sale 

of,  12. 
When  losses  in  connection  with 
deductible   in   computing  in- 
come, 17. 
REAL  ESTATE  AGENT: 

Commission    paid    to    deductible 
in  computing  income  of  in- 
dividual, 8. 
RECEIPT: 

For  payment  of  tax,  49. 
RECEIVER: 

See  FIDUCIARY. 
RECORDS: 

To  be  kept  by  persons  licensed 
to  collect  foreign  income,  7L 
REMOVAL: 

Of  buildings,  etc.,  losses  due  to, 
not  deductible  in  computing 
income,  17. 
RENT: 

Collection  at  the  source  of  tax 

on,  65. 
Included  in  corporate  income,  14. 
Interest    on    mortgage    paid    by 
corporation  in  lieu  of,  to  be 
returned  as  expense  of  do- 
ing business,  37. 
Paid   by   corporation,   deductible 
in  computing  income,  15,  16. 
RESERVE : 

For     anticipated     or     probable 
losses  not  deductible  in  com- 
puting corporate  income,  17. 
For  taxes  not  deductible  in  com- 
puting     corporate      income, 
20. 
Maintained    by    banks    not    de- 
ductible   in     computing    in- 
come,  16. 
RESIDENCE : 

What  constitutes,  1. 
RETIREMENT : 

Of  corporate  bonds,  collection  of 
tax  on,  63. 
RETURN : 

By    Commissioner    of    Internal 
Revenue  for  delinquent,  44. 
Disclosure  or  publication  of  in- 
formation   contained   in,   45. 
Extension   of  time   for   making, 

30. 
Form  of,  generally,  32. 
Increasing  amount  shown  by,  44. 


96 


INDEX. 


RETURN  (Cont): 

Inspection  of,  45. 

Made  by  representative  in  case 
of  inability  or  absence  of 
taxpayer,  34. 

Necessity   for,  26. 

Penalty  for  failure  to  make,  75, 
76. 

Penalty  for  making  false  or 
fraudulent,   75,   16. 

Time  for  making,  30,  1(>. 

To  whom  made,  31. 

Verification  of,  43. 

Who  required  to  make,  1^ . 

See  also  CORPORATE  RE- 
TURN; FIDUCIARY  RE- 
TURN; INDIVIDUAL  RE- 
TURN; LIST  RETURN. 

SALARY: 

Of  corporate  officer,  extent  to 
which  deductible  in  comput- 
ing corporate  income,  15. 

Of  foreign  employee  of  domestic 
corporation,  not  subject  to 
withholding  of  tax,  54. 

Of  public  officer  or  employee,  ex- 
emption of,  24. 

Of  $3,000  or  more  paid  by  cor- 
poration to  be  shown  in  cor- 
porate return,  37. 

Paid  to  widow  of  officer  or  em- 
ployee not  deductible  as  busi- 
ness expense,  8,  15. 

Received  from  exempt  organiza- 
tions to  be  included  as  in- 
come, 7. 

Tax    to    be    withheld    from,    on 
basis  of  calendar  year,  66. 
SALE: 

Of  real  estate,  computation  of 
profit   from,   12. 

Of    real    or    personal    property, 
when   loss   on   deductible  in 
computing  income,  9. 
SALESMAN : 

Commission  paid  to  deductible 
as  business  expense,  8. 

Spending  or  treating  money  ad- 
vanced to  deductible  as  busi- 
ness expense,   16. 

Withholding  of  tax  on  commis- 
sion, 54. 
SCRIP  CERTIFICATES: 

Withholding  of  tax  on,  55. 
SECRETARY   OF   THE   TREAS- 
URY: 

To  approve  forms  of  returns,  32. 
SECURITIES: 

Fluctuations  in  value  not  deduc- 
tible as  losses  in  computing 
income,  9,  17. 

Public,  owned  by  corporation, 
interest  on  exempt,  25. 


SOURCE  OF  INCOME: 

Meaning  of  term,  50. 

Who  regarded  as,  56. 

See    also    COLLECTION    AT 
THE    SOURCE. 
SPECIAL  COMPENSATION: 

Paid    by     state    or    subdivision 
thereof  for  professional  ser- 
vices, exempt,  24. 
SPECIFIC   EXEMPTION: 

General  discussion  of,  22. 

Claim  of  with  respect  to  income 
taxable  at  the  source,  50,  60, 
67,  69,  73. 

Claimed  by  beneficiary,  to  be 
shown  in  return  of  fiduciary, 
38. 

Claimed  by  owners  of  bonds  to 
be   shown    on    monthly  list 
returns,   40. 
SPENDING  MONEY: 

Advanced  to  salesmen  deductible 
in    computing    corporate  in- 
come, 16. 
STAMP   TAX: 

Application  to  income  tax  certifi- 
cates, 53. 
STATE: 

Bonds  or  securities  issued  by, 
see  PUBLIC  SECURITIES. 

Exemption  of  compensation  of 
officer  or  employee,  24. 

STOCK: 

Consideration  of  sale  by  cor- 
poration in  computing  cor- 
porate income,  21. 

Shrinkage  in  value  not  de- 
ductible in  computing  in- 
come, 9,  17. 

When   loss   on   deductible,    10. 
STOCK  DIVIDEND: 

Valuation  at  which  accounted  for 
in   individual   return,   34. 
SUBSIDIARY  COMPANIES: 

List   of   to   be   attached   to   cor- 
porate return,  37. 
SUBSTITUTE  CERTIFICATE: 

Of  collecting  agent,  authority  to 
make  substitution,  57. 

Record  of  substitutions  to  be 
kept,  58. 

Reference  to  in  monthly  list  re- 
turn, 41. 
SURRENDER  OF  CONTRACT : 

Of  employment,  amount  paid 
for: 

Included  as  income,  7. 
Taxable  at  the  source,  51. 
TAXATION : 

Securities  guaranteed  free  of, 
collection  of  tax^  on  inter- 
est, 64. 


INDEX. 


97 


TAXES  : 

Deduction   of   in   computing   in- 
come, 8,  20. 
Paid  by  tenant  deductible  from 

income,  8. 
Paid  to  foreign  country  not  de- 
ductible  in    computing   indi- 
vidual income,  8. 
To  be  shown  in  return  of  cor- 
poration, 37. 
TAXING   PERIODS: 
Generally,  45. 
See  also  FISCAL  YEAR. 
TEACHER : 

Exemption   of    salary   of   public 
school  teacher,  24. 
TELEPHONE  COMPANY: 
Mutual  or  co-operative : 

Computation  of   income,  21. 
Not  exempt,  3. 
TENANT: 

Duties  with  respect  to  withhold- 
ing tax  on  rent,  65. 
Right   to   deduct  taxes   paid   on 
leased  property,  8. 
TESTIMONY: 

Compelling,  44. 
TIME: 

For  making  and  filing  return,  30, 

76. 
For  notice  of  assessment,  47,  76. 
For  payment  of  tax,  48,  76. 
TREASURY  STOCK: 

Not    included    in    corporate  re- 
turn, 35. 
TRUST: 

Duty  of  beneficiary  to  show  in 
return       amount       received 
from,  33. 
TRUST   COMPANY: 

Deduction     of     interest    paid    in 

computing  income,  20. 
See  also  BANK. 


TRUST  INCOME,  COLLECTION 
OF  TAX  ON : 
Generally,   71. 
Corporate  dividends  in  hands  of 

fiduciary,  73. 
Tax  to  be  withheld  although  in- 
come not  distributed,  72. 
TRUSTEE: 

See  FIDUCIARY. 
UNITED  STATES  JUDGE: 
Compensation,  exempt,  24. 
Compensation  not  to  be  included 

in  return,  33. 
Tax  not  withheld  on  compensa- 
tion, 54. 
WARD: 

Personal  return  by  guardian  for, 
39. 
WEAR  AND  TEAR: 

Deduction  for  in  computing  in- 
come, 10,  17. 
WIDOW: 

Of    officer   or    employee,    salary 
paid  to: 

Not  considered  as  income,  7. 
Not    deductible    as    business 
expense,   8,    16. 
WITHHOLDING  AGENT: 
List   returns   of,   40. 
Meaning  of  term,  50,  64. 
Statement  for  exemption  or  de- 
ductions by,  67. 
Time  for  return  of,  30. 
When  to  forward  amount  with- 
held, 48. 
WITHHOLDING   AT    THE 
SOURCE : 

See    COLLECTION    AT    THE 
SOURCE. 
WORTHLESS  DEBT: 
See  BAD  DEBT. 


UNTVERSIT 


X,-TfC}^ 


n 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  50  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.00  ON  THE  SEVENTH  DAY 
OVERDUE. 


JAN  28  T_:. 

9 

b 

LD  21-95m-7.'37 

YD  0549 


312488 


UNIVERSITY  OF  CAUFORNIA  UBRARY 


'M 


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